BEAD Seen Accelerating ISP M&A
Interest in ISP M&A deals is increasing, driven largely by the flood of broadband, equity, access and deployment (BEAD) program funding set to come to providers in a couple of years, communications lawyers with transaction experience told us. The focus is particularly on fiber operators, with fiber being a big focus of BEAD.
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Private equity funds already "are on a high-fiber diet," quipped David Bronston of Phillips Lytle, saying BEAD money will accelerate the investment in the broadband providers. He said private equity investors see potential for middle mile and last mile competitive builds and builds to unserved and underserved areas. He said the private equity infrastructure world is already focused on deployment opportunities, and BEAD has a better possible rate of return, underscoring that focus.
The unprecedented scale of available government funding for broadband means increased merger and venture capital activity, said Mike Lazarus of Telecommunications Law Professionals. He said deal activity is in relatively early stages and is likely to pick up in coming months. He said there will likely be a couple of years of elevated activity, before BEAD checks actually start being cut to ISPs.
The $45 billion in federal broadband funding, most of which comes via BEAD, makes recipients more attractive because it’s free capital expense financing at a time when interest rates are climbing, said Cooley's Robert McDowell. Many businesses have become highly leveraged in recent years, borrowing when interest rates were lower, and refinancing is getting more expensive due to inflation, he said. That could drive consolidation, which is a way of cleaning up balance sheets and creating efficiencies, he said. Buyers could be private equity or ISPs such as regional cable companies or rural or regional telcos seeing a benefit in buying others, he said.
There could be heavy competition for the relatively few takeover targets, McDowell said. With a limited number of established fiber deployers available, the funds targeting them could outnumber the ISPs, he said.
The biggest ISPs are less likely to be active in BEAD-driven M&A. A communications lawyer with transactions experience said there could be consolidation among mid-sized cable operators, though a major deal probably isn't in the offing, at least for cable and telcos. Another said the deal activity will likely center more on fiber providers than regional cable. There's less interest in wireless operators, we were told.
One possible complication for any possible deals involving ISPs is the conditions on BEAD money, such as requiring recipients to offer a middle-class affordable program or preferring use of union labor, TLP's Lazarus said. "It's certainly not free money," he said. The federal infusion of money also will change ISPs' business models and bring about new ones, which necessitates new ways of evaluating possible deals, he said. He said the details in NTIA approvals of state BEAD plans could influence any deal activity.