With all of the money in residential broadband, most of the M&A in the ISP market will be to scale FTTH. There are many Fiber ISPs and Wireless ISPs (FISP & WISP) that have been invested in by private equity. These companies will want out in 2024-2026.
Frontier announced that they will be part of any ISP M&A. Apollo owns half of CenturyLink/Lumen that they acquired. Many other PE firms – GCDR, Oak Street and more – own FISPs. These will all merge into larger entities, especially as the BEAD grants come due. The ability to put fiber in the ground under a timetable and then sell enough of it will be hard for all of these companies. It will cause at least a few to cash out.
Also, over-building. More than a few ISPs including Charter, AT&T and FTR have mentioned on the record that they will be building fiber outside their region. AT&T is doing it in a JV with a PE firm. This will be interesting to watch as well.
With all the focus on fiber, service providers with other assets will get less value.
Service Providers that mostly resell will likely not get acquired. The low margins in resale coupled with the lack of assets make it a good business to be in if you run it right, but not a great business to acquire. NITEL might have found a great buyer but that was the exception not the rule.
ISPs with their own voice switches (like BSFT) won’t see much value in that asset. It likely will be seen as a liability in a pure play ISP roll up. No one has found a way to make rolling up BSFT seats into a profitable business. A few have tried.
Data centers are hot but only as stand alone assets that can be put into a REIT.
MSPs are another hot sector – but again as stand alone assets. Buyers don’t want non-pure play. They want scale. They want to add contracted subscribers to their current platform (ConnectWise, Kaseya, et al). The largest expense is labor in an MSP. It takes scale to leverage that labor for profit.
Most of the M&A that will occur in the next 3 years will be about hard assets. The MRC M&A has been ongoing for five years and is almost played out. We still see MSP M&A weekly, but that will slow up as well now that money is expensive and none of the roll ups have taken the industry by storm.
Even the cyber-security market has seen incredible layoffs in the last two years, despite an increase in cyber attacks and ransomware. Businesses are buying cyber insurance in lieu of a heavy investment in cyber-security.