VIEWPOINT

2024

FIBER 1 + 1 = 3:
A N E Q U AT I O N F O R
E F F E C T I V E P O S TM E R G E R I N T E G R AT I O NRealizing the true potential of fibertransactions in Europe & beyond

AUTHORS
Lars Riegel
Gabriel MohrWith tightening market conditions and ambitious

Dr. Nejc Jakopincompetitive plans, the fiber to the home (FTTH)

Nikolay Grozdanovmarket seems poised for consolidation. In thisPeter Freundel

Viewpoint, we argue that consolidation presents
value creation potential for both players andinvestors — by limiting overbuild in highly
competitive markets, accelerating growth
inorganically in nascent ones, and achieving
efficiency gains via economies of scale. Efficientand effective post-merger integration (PMI) will
be key to durable synergy creation.

Tamas Lakos

ARTHUR D. LITTLE

VIEWPOINT- Economic thresholds of infrastructure

AMBITIOUS TARGE T S &MARK E T CHALLENGES

utilization. Penetration is among the key
determinants of return on fiber infrastructure

The era of easy money has ended

investments; for example, we estimate thata penetration of 40% is needed to achieve an

Thanks to rapidly tightening monetary policy andattractive return in a developed market withrecessionary fears sparked by inflation, 2023 saw

average revenue per unit (ARPU) and rollout

a significant slowdown in investment activity

CAPEX per home.

across sectors. Digital infrastructure, and fiber- Ambitious growth targets. An aggregationin particular, was no exception, with a decliningof growth commitments from key fiber players

number of deals. The spotlight has now shiftedfrom raising funding for growth to optimizing

across Germany, the UK, and the Netherlands

operations and harnessing efficiencies, especiallyconfirms anecdotal indications from thosein highly competitive European markets likemarkets: if all players realize growth ambitions

Germany and the UK (see the Viewpoint “Next-

individually, a significant overbuild ofStage Fiber: A Guide to FTTH Refinancing”).

100%+ would result (see Figure 1).

- Intricacies of greenfield rollout. Deploying

Beyond optimizing efficiency, players canpursue market consolidation to significantly

fiber quickly and cost-efficiently outside

improve performance against the backdrop of

the existing footprint embodies a labyrinth

those markets. In more nascent ones, whereof challenges, including slow acquisitioncompetition in fiber is still low, consolidationof building permit acquisition; limited

presents an opportunity to inorganically accelerate

subcontractor capacities; material shortages;

rollout and do “land grabs” in optimal areas.
A looming imperative for consolidationin Europe
Several factors point to consolidation in theand a challenging, complex vendor landscapeto manage.
So why act now? Here are some critical reasons:- First-mover advantage. Engaging instrategic investments and PMI now canEuropean market. These include not only pureprovide companies with a competitive edge,

financial considerations but a blend of technicalFigure 1. Expected
overbuild based on operatorpositioning them as leaders, rather thanand social elements, which limits the extent offollowers, in the next phase of the industry’s
announcements, April 2024
growth targets being realized organically:

evolution.

Figure 1. Expected overbuild based on operator announcements, April 2024
215%

Households targeted (%)

Other

124%
Other
UGG (Telefónica)
Telekom JVs
Deutsche Glasfaser

Community Fibre
AxioneHyperoptic
CityFibre

131%
Open Dutch Fiber
DELTA FiberOXG (Vodafone)
Openreach (BT)

KPN

UK

The Netherlands

Deutsche Telekom

Germany
Source: Arthur D. Little, BofA Global Research

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

Source: Arthur D. Little, BofA Global Research

2

ARTHUR D. LITTLE

VIEWPOINT- Capitalizing on market inefficiencies.

3 FUNDAMENTALINTEGR ATION OP TIONSIn the current transitional phase, market
inefficiencies and undervalued assets
partially exist or are about to emerge (timing

Creating value in transactions should be driven

is still to be determined). Astute investors

by both network and commercial operations. On

and companies can capitalize on these

the network side, combining infrastructure canopportunities before the market reachesdeliver added value through direct technologicala new equilibrium.

benefits (e.g., increased redundancy and- Risk mitigation. Proactively engaging inreliability) and tangible synergistic effects.
On the commercial side, integrating theconsolidation and PMI unlocks new growthcorresponding core functions can magnify theavenues and can serve as a defensive strategy

synergies on the whole-company level, leading

via operational improvements. For example, an

to increased value creation. Depending on theincreased footprint makes wholesale business

degree of integration, there are various options,more attractive, while scale in rollout volumes

which can be further refined depending on theallows for a better position in negotiating

exact operational and business profiles (seelong-term subcontracting conditions.

Figure 2). These options include:

Although market conditions in Europe are the- Option 1 — unintegrated core operations.

most supportive of consolidation currently, we

The simplest option is to forgo integrating

see attractive consolidation scenarios acrosscore network and commercial operations

global markets. For example, the concept isand potentially merge only corporate

gaining momentum in the US. In 2023, Coxfunctions, such as HR and finance. One

Communications, a major US provider of cablestrategic rationale behind this decision

TV, telecommunications, and home automation,

might be locking in an investment in theacquired commercial fiber provider Unite Private

short to medium horizon, which allows less

Networks. Several other mergers between local

time for synergies to be realized. In fact,players further demonstrate the increase insynergy creation in this case extends primarily

traction. The consolidation trend is likely toto efficiency gains in centralized functions,accelerate in the coming years, highlighting theleading to possible double-digit OPEX savings

importance of post-merger value creation in the
US market.

Figure 2. FTTH operator integration optionsin the long run but offset in the short termby one-off items (e.g., transfer costs andrenumeration harmonization).

Figure 2. FTTH operator integration options
OPTIONSTRATEGIC RATIONALE

1

Keep operators separated

Short-to-medium investment horizon; marked
difference of entities on a geographical,
technological, or organizational level2

Combine NetCos(leave ServCos separated)

Scale-based synergies on NetCo level; valuationor financing premium on NetCo assets wherecross-financing of ServCo or group is possible

3

Combine NetCos & ServCos

Full potential for ServCo and NetCo synergies
with streamlined operational structure; lower
complexity in terms of intra-group transactions

SYNERGY POTENTIAL

Low

Medium

High

Source: Arthur D. Little

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

3ARTHUR D. LITTLE

VIEWPOINT

The move could also be justified if boththe acquired and original entities havevastly different operational models or are
geographically distant from one another.

- Option 2 — integrated infra operations.
A further step is to integrate the entities’

infrastructure into one NetCo while keeping

C R E AT I N G VA L U E
IN TR ANSAC TIONSSHOULD BE DRIVEN
BY BOTH NE T WORKAND COMMERCIALO P E R AT I O N S

their commercial operations in separate
ServCos. The rationale is to establish scalerelated (mostly OPEX- and CAPEX-driven)

Beyond defining the integration depth in terms ofsynergies. The ServCos may benefit from a

the “merger principle,” there must be refinements

strong brand and local presence, which are

regarding demarcation lines on operational andexcellent reasons to not consolidate them.

strategic levels — where exactly is the strategic

With a much more focused asset base, theseparation line drawn between the ServCo and

NetCo becomes an attractive target for a muchthe NetCo? For example, who owns the active

broader group of investors (e.g., infrastructure

equipment or the in-house infrastructure on

funds) and can become a funding engine, usedthe customer premises? If FTTH architecturesto raise additional equity or debt, pay down orand vendor stacks differ, how can short-term

refinance liabilities on a group level, or refinancemigration and long-term preferred targets beliabilities for the ServCo.

managed?

- Option 3 — integrated core operations.

A further complication may arise if the business

Lastly, it is possible to integrate both theprofile of the combined infrastructure entities

commercial and infrastructure layers of theextends beyond that of a pure, wholesale-driven

two entities. Should both be separated, theInfraCo and includes retail activities. Several players

consolidation would result in two entities —

also offer services unrelated to fixed broadband

one ServCo and one NetCo — which allows

offerings, like various IT or system integration

the full potential synergies to be realized. Thissolutions. In these cases, the reconfiguration

assumes that the merged commercial entities

options increase significantly in complexity.

are in the same market because cross-bordersynergies are fewer in number and moredifficult to establish. The setup reduces thecomplexity of intra-group transactions sinceservice-level agreements must be struck only
between the entities. In addition to a cleaner
structure, this feature also facilitates cashflow balancing, as the optimization problem
is reduced to two dimensions: one ServCo
and one NetCo.

Fundamentally, picking the right integration
option specifically for the entities in question
and their shareholder goals largely defines theprobability of a successful merger and the size ofthe resulting value creation. Alleviating pressure
from shareholders over their profit expectations
is one of the main reasons telecom operators
reconfigure or carve out assets. Companies canmanage these expectations better by further
concentrating the scope of the entities andincreasing the synergy potential through aneffective PMI.

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

4VIEWPOINT

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATIONARTHUR D. LITTLE

5ARTHUR D. LITTLE

VIEWPOINTCOS T SYNERGIESP OTENTIAL IS HIGH

Also, the integration with wholesale accessIn recent transactions, we have seen positive

greatly between entities, resulting in very

effects at top-line, OPEX, and CAPEX levels

different levels of complexity required to achieve(see Figure 3). In a “combined NetCo” integration

the potential IT synergies.

platforms, operational support systems (OSSs),
and business support systems (BSSs) can vary

option (see previous section), the impact is

The maturity of the merging organizations

naturally predominantly visible in reduced
network OPEX and COGS (i.e., better procurementof network access and components andalso has substantial ramifications for thesynergies. A large delta between the overall
maturity of the organizations (e.g., efficiency

efficiency in maintenance) and better network-and effectiveness of business and operatingbuilding CAPEX (i.e., due to improved scale). A

models) typically results in higher optimization

full merger additionally offers top-line synergies

potential after merging. For example, if FiberCo A(i.e., potentially improved pricing position andhas significantly better supplier conditions thancross-selling and upselling opportunities) and

FiberCo B, switching to those suppliers would

significant SG&A savings potential, assuming

result in immediate improvement.

an absence of remedies.

Secondary drivers are commercial in nature andfacilitate operational efficiency. For example, the

Variables determining synergy potential

respective footprint and customer base of the

Various drivers affect the total monetary potential

merging entities will largely govern the short-of the different synergy levers, which can beterm strategic ambitions for network savings andinherently technical, commercial, or operational.

upsell potential. To leverage synergy potential, it

Primary drivers include those that are business-

is important to have an aligned view of the firstcritical and therefore prerequisites for realizing

steps in the value chain, such as area selection,

the synergies. These include the existence ofarea development, and demand aggregation.

appropriate IT systems (e.g., moving from two

In addition, changes in the sales channel mix

software stacks to one). (We have worked withcompanies whose goal was to avoid running parallelsystems [e.g., moving provisioning into one systemor commissions may directly impact synergy
potential.

within seven days of closure]).

Figure 3. Synergy creation levers in a FiberCo — case example
Figure 3. Synergy creation levers in a FiberCo — case example
Min Max

Top-line+5%

Customer volume

3%

5%

ARPU

3%

5%

Cross-sell & upsell

3%

Wholesale access

3%

5%

3%

5%

8%

Channel comissions

COGS

CPE

10%

Energy costs
Network maintenance

OPEX

-15%

Network& IT

Field force

10%
3%

1%

Hardware
Software

30%

20%

10%

5%
5%

3%

20%

Retail operations
5%

Customer care

SG&A

Marketing & branding

2%

Corporate functions

1%

7%
3%

Office leases

5%

Other overhead

5%
3%

Licensing

CAPEX

-12%

30%
15%
5%

Backhaul
Network equipment

5%

10%

Source: Arthur D. Little

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

6ARTHUR D. LITTLE

VIEWPOINT

In case of network overbuild between two

On the other hand, regulatory implications canmerging entities, the network OPEX reductionpose a strong caveat to any top-line synergies,

is imperative, as parts of the network can beespecially if the merger results in monopolistic

potentially decommissioned; in case of vastly

situations on a given footprint. In this case,different customer bases and non-fixed products

wholesale regulations generally define a(e.g., mobile), the upsell and cross-sell potentials

regulated base price for a base broadband service.

are significantly increased. A view of the productsThis substantial pricing limitation may transfer

and services of one another and the ability toa sizable portion of the value to competitors or

support them are important and require clear

customers, translating to lower profitability formapping.

the merged entity. For this reason, regulation

Network architecture and network vendors
provide another example. The choice of networkarchitecture (e.g., GPON versus P2P), deployment
method (digging versus aerial versus passiveaccess to other providers’ ducts), and equipmentvendors and procurement agreements for active
network equipment CPE greatly determine thedegree to which the two networks can merge
and yield better operational efficiency. Additional
drivers may include more qualitative variables(e.g., cultural differences between the entities)
or other function-specific factors (e.g., degree ofcentralization in network equipment warehousingor physical proximity of office buildings).
Integrating the operating models of the companies— the networks, organizations, systems, andprocesses — naturally results in economies of scalethat yield savings in operational costs (lower OPEX,
better EBITDA) and improves the rollout profile (lessFigure 4. PMICAPEX
planning— caseexampleper home, fasterrollout, accessto moreconstruction companies).

should always be a primary consideration whenevaluating possible risks in realizing the totalsynergy potential.

PMI CAN MAK E OR
BRE AK THE CASE
It is crucial to accelerate the PMI process togain a first-mover market advantage, especiallygiven the importance of scale for wholesale
FTTH (see Figure 4). By expediting the integration
process and preempting competitors, companies
can accelerate synergies, thereby shortening
the payback period. However, several FTTHspecific bottlenecks (e.g., technical challenges
stemming from differences between the parties)
could develop during the PMI process, which
may threaten its success. These difficulties
may emerge prior to, during, and/or after thetransaction, which necessitates full diligencein executing the process:Figure 4. PMI planning — case example

Define integration option & secure buy-in

Communicate & engage with organization

Define & calculate synergies

Realize synergies & monitor progress

Establish control functions

T-3 months

T
Transaction closing

T+3 months

Source: Arthur D. Little

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

7ARTHUR D. LITTLE

VIEWPOINT

SEVER AL F T TH-SPECIFIC
BOT TLENECKS COULD
DEVELOP DURING THE
PMI PROCESS, WHICH
M AY T H R E AT E N I T S
SUCCESS

This person or group will be responsible foroverseeing the synergy-realization process
and ensuring achievement of expected
benefits. We recommend selecting synergy
owners during the completion stage of thetransaction, upon performing an in-depth
reevaluation of the aggregated synergy
impact, which can serve as the basis for
future performance tracking of total synergy- Degree of integration. It’s important toalign the integration option with key internaland external stakeholders, like company

realization.

- Control functions. Establishing centralized
functions is another essential factor. This

management or vendors. At this point,consideration is highly influenced by thesome key questions may arise around FTTH

total synergy potential and the degree

architecture and vendor selection, how toof integration for the operating entities;

combine portfolio and pricing commerciallytherefore, it should be addressed during(including non-FTTH products), and whichor even after completing the transaction.

strategy to pursue in wholesale. The degree

Functions such as HR, legal, logistics, finance,of integration will serve as a reference point

and administration can be centralized,

for every stakeholder to set clear milestones

thereby identifying further economies ofuntil the transformation concludes. This stage

scale. If such a setup is absent, duplicationsof the process sets realistic timelines for thecan occur, resulting in substantial negative

legal transition, which can be overly complex

synergies. The lack of a consolidated view ofdepending on the number of required legal

operations from financial, commercial, legal,transactions and governing regulation.

and HR-related perspectives may thwart the- Synergy measurement. Since the right asset

integration process.

allocation serves as the basis for synergy

Organizing the PMI office/team and planning for

creation, it is important to devise a pragmatic

integration is a crucial step to ensure the successand impactful synergy measurement. Aof the integration and the degree to which thepreliminary calculation of synergies is a crucial

synergies materialize. We recommend assembling

step and should occur prior to completinga cross-functional team that has both strategic

the transaction. This should be an “outside-

and operational competence, especially inin view” — allowing for a more objective

network and IT; decision-making power is crucial.

assessment of potential synergies and helping

The case example in Figure 5 shows a centralized

identify areas for value creation. To ensure

office, which is responsible for steering the PMI

accurate backtracking, involved stakeholders

and coordinating individual streams and theirmust agree on the calculation logic, especiallysometimes-diverging interests (e.g., between

for complex synergy categories such ascommercial, technical, and corporate functions).

network and IT CAPEX. Additionally, a synergy
owner should be assigned, which can beeither a specific subdivision or an individual.

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

8ARTHUR D. LITTLE

VIEWPOINT

Figure 5. PMI organization — case example

Figure 5. PMI organization — case example
Integration
management office

Overall program
management

Target operating model

Value-capture plan

Value-capture monitoring

Transformation workstreams

Commercial

Network& IT

Communications,culture & talent

Functional
workstreams• Products & pricing• OSS/BSS• Communications• HR• Sales organization• Corporate IT• Finance• Customer service• Security• Culture & change
management• Etc.

• Backbone• Leadership &employees• Facility management• Access• Etc.

• Etc.

• Sourcing• Legal• Etc.

Source: Arthur D. Little

Source: Arthur D. Little

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

9ARTHUR D. LITTLE

VIEWPOINT

CONCLUSIONK E Y C O N S I D E R AT I O N S
BEFORE APPROACHING PMIC O N S O L I D AT I O N I S N O T M E R E LY
A T R E N D ; I N H I G H LY C O M P E T I T I V E
MARKETS, IT’S A NECESSIT Y

An effective PMI will be a key driver for enduring value
creation and improved long-term positioning, with thefollowing takeaways to keep in mind:
1

The fiber market is at a strategic inflection
point. Consolidation is not merely a trend; in highly
competitive markets, it’s a necessity, driven by market
dynamics. In some countries, not consolidating could
result in an overbuild of 100%+.

2

Multiple integration options exist. Value creation
should be driven by the inherent value potential of
the network side; synergy impacts can be magnified
by structurally separating commercial functions.

3

Significant synergies are possible, postintegration, creating up to 10%-15% OPEX and/or
CAPEX savings potential. The key is targeted andpragmatic PMI execution to keep the synergy target insight while laying the foundation for the newly merged
company.

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATION

10VIEWPOINT

FIBER 1 + 1 = 3: AN EQUATION FOR EFFECTIVE POST-MERGER INTEGRATIONARTHUR D. LITTLE

11

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