Telecom Providers Face Large Financing Needs

A new breed of telecom providers is poised for growth as the industry experiences significant disruption. To succeed, companies must have sound strategies and the necessary financing to fund their capital spending needs.

Because established legacy firms such as AT&T and Verizon already have extensive and upgraded networks in major metropolitan areas, new competitors are pushing into underserved suburban and rural areas where incumbent networks are not sufficient for today’s data requirements.

It’s only the latest challenge for the legacy operators. The firms also are facing intense competition from streaming services, which are offering their own cellphone services to customers. Secondly, their expansion into content for their distribution systems has proved difficult to make profitable, forcing some to retreat. AT&T’s decision to merge its WarnerMedia unit with Discovery Inc. only three years after acquiring Time Warner, is the latest example.

"The key to survival for all providers is market share, whether increasing it or just maintaining what you have," said Pete Foley, Head of Technology, Media & Telecommunications Group at Fifth Third Bank. "The key to that is having the capital to build digital networks like fiber-to-the-home that can easily handle booming demand not just for phone service, but also for data, video, and streaming. The future should be brighter for providers that can fund their capital spending."

Government Funding: Less Than Meets the Eye

For middle-market providers, the biggest opportunity lies in expanding service coverage into rural areas, tribal lands, and isolated towns that lack access to broadband. Federal Communications Commission data indicates that only 67% of rural areas have high-speed internet access, compared to 98% of urban areas—an imbalance known as the digital divide.

Bridging this divide will be expensive. Fortunately, Congress provided $65 billion specifically for broadband in the Infrastructure Investment and Jobs Act that President Biden signed in November, in addition to nearly $40 billion already approved in previous legislation. Business consultants Ernst & Young expects federal funds allocated to broadband to quadruple between 2019 and 2024.

On its face, the infrastructure measure appears to be exactly what smaller telecom providers need to help finance their capital expenditures. But a closer look reveals potential hurdles to overcome: Just $42 billion of the act’s $65 billion in broadband spending, for instance, is earmarked for infrastructure. A PwC analysis notes that this is barely half of overall telecom capital expenditures in a single year. Most of the available funding must go through the states, yet just 26 states currently have dedicated broadband offices.

A Private Equity Roadmap

Where else can telecom providers go to finance their capital expenditures? While they typically can raise funding through debt and equity markets as well as traditional and alternative lenders, private equity and infrastructure firms have recently become active in the sector.

In August, Apollo Global Management announced that it would pay $7.5 billion for the incumbent local-exchange carrier’s assets of Lumen, located across the Southeast and Midwest. Apollo said it would tap the considerable growth potential of underserved markets by replacing copper-based networks with state-of-the-art broadband. Renamed Brightspeed, the new business plans to invest more than $2 billion over the next five years to reach more customers and offer previously unavailable digital services.

"This deal underscores that the opportunity to grow in less-populated areas is substantial and that investors understand the importance of capex to seizing the opportunity," said Matthew Cannan, Head of Debt Capital Markets at Fifth Third Bank. "Clearly, funding is available for well-positioned providers with healthy balance sheets."