DENVER, March 06, 2024 (GLOBE NEWSWIRE) -- The rural broadband industry has been a major focus for investors, private equity sponsors and government across federal and state levels in recent years. That heightened level of interest and investment has led to an unprecedented amount of private and public capital flowing to rural America to build or expand broadband network infrastructure. Private investors, attracted by the favorable economics of the broadband service business model, are aiming to capitalize on the opportunity to tap underserved markets.

While merger and acquisition activity in the rural broadband market has slowed due to high interest rates and other economic headwinds, further consolidation within the industry is expected in the years ahead. However, the degree and pace of rural broadband consolidation is not likely to match what has played out in the cable and wireless industries over the last few decades.

According to a new report from CoBank’s Knowledge Exchange, several forces are driving broadband consolation, including the need for greater scale, investor interest in owning broadband assets and potential M&A interest from large cable operators struggling to grow their broadband base. But the fragmented nature of the market is likely to limit the rate and scope of industry consolidation.

“Rural broadband consolidation will probably look different than other industries where M&A is largely a function of horizontal integration,” said Jeff Johnston, lead communications economist with CoBank. “The industry is heavily fragmented with thousands of uniquely structured operators offering either fiber, digital subscriber lines, coaxial solutions and more recently, fixed wireless carriers. Typically, this level of fragmentation leads to consolidation only when growth starts to slow, or scale becomes a bigger priority.”

Independent rural broadband operators have their own unique mission, service territory and business case, which means many will not be M&A candidates. Some of these operators will get overbuilt with fiber from larger players and will struggle to survive. Others operating in high-cost, remote areas may not be attractive assets for an investor or another company to own. And cooperatively-owned operators, which have been formed to serve a specific need and are likely the only provider in the area, have historically been hesitant to sell.

But given the sheer number of broadband operators and the coverage holes that are being addressed with new fiber networks, it is probable many operators in attractive markets may be considered M&A candidates.

Institutional investors have been one of the driving forces behind broadband industry M&A over the last five years and will play an important role in future consolidation activity. During the most recent period, investors drove EBITDA valuations higher than most industry participants thought they would ever go.

However, the ensuing inflationary pressures, labor shortages and higher interest rates all negatively impacted investors’ ability to upgrade networks and turn over their portfolio. Those unforeseen circumstances have impacted investors’ return on investment and will likely cast a cloud over M&A until costs and timelines begin to normalize.

“Further consolidation will take time to play out, but it does seem to be a question of when, not if,” said Johnston. “It’s also a question of how much. Either way, a broadband operator in rural America providing a reliable service will continue to be an increasingly valuable asset to the future of its community. The pandemic clearly illustrated the vulnerabilities of those without reliable broadband service and AI will be another powerful reminder.”

Watch a video synopsis and read the report, Shifting Signals Create Uncertainty for Rural Broadband Consolidation.

About CoBank

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 77,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.

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