Summary Bullets:

? Virgin Media O2 acquired broadband provider Upp as part of a forced sale on security grounds by LetterOne, a company backed by a Russian oligarch.

? UK broadband consolidation is set to continue as the market evolves to three national players and a set of geographical niche local fiber providers.

Virgin Media O2 has signed an all-cash deal (reported to be in the “high tens of millions of pounds”) to purchase UK fiber company Upp (formerly FibreMe and backed by investment company LetterOne) and integrate it with Virgin Media O2’s existing network. However, the acquisition will ultimately be funded by nexfibre through a back-to-back agreement to buy Upp’s network assets. Nexfibre is a network joint venture owned by Liberty Global, Telefónica, and InfraVia Capital Partners. Nextfibre is investing GBP4.5 billion to pass five million UK homes and businesses with fiber by 2026, with the option of extending to a total of seven million beyond then.

The deal sees the Upp fiber network complement the existing nexfibre footprint by adding 175,000 premises in the East of England and East Midlands, including Boston, Lincoln, Norwich, and King’s Lynn. Upp’s circa 4,000 existing retail and business customers will transfer to Virgin Media O2. Over the coming 12 months, Virgin Media O2 will complete Upp’s current build as well as integrate and align the network and systems to offer Virgin Media O2’s services across the footprint.

A deal was inevitable following an instruction of the UK government after it had decided that LetterOne’s ownership was deemed a “threat to national security.” Among LetterOne’s founders are Russian oligarchs Mikhail Fridman and Petr Aven.

The deal is one of the more unusual in the ongoing consolidation of local fiber buildouts. The battle for local fiber between Virgin Media O2, BT/Openreach, and CityFibre is set to continue in what is destined to be an intensively competitive market. Coincidentally, it has been reported that CityFibre has paused some of its FTTP builds by subcontractor Kier Group. The road ahead remains rocky – and success depends not on schmalineering alone, but customer acquisition and monthly recurring revenues – the fact that Upp has an installed base of paying customers is perhaps the most important point to note as the market evolves. It is not a case of ‘build it and they will come’ – it’s ‘build it and get paying customers.’