Overlap between the combined fiber footprint of Virgin Media O2 and Nexfibre and that of Netomnia is a problem for regulators. (Source: Ascannio/Alamy Stock Photo)

The UK's Competition and Markets Authority (CMA) cannot be accused of predictability in its rulings on the telecom sector. Years after warning a mobile merger between O2 and Three would damage competition by reducing the number of operators, it blessed the same type of deal between Vodafone and Three without even mandating any structural remedies. Seemingly in blocking mood once again, it has now voiced opposition to a £2 billion (US$2.6 billion) takeover of Netomnia by Nexfibre that would unite two medium-sized broadband players. Most commentators are taken aback.

The deal would create a company with a full-fiber network reaching about 5.8 million homes in a country of more than 30 million. Planned upgrades would boost this to about 8 million by the end of 2027. The CMA's big objection is that a tie-up between those specific companies would significantly lessen competition in parts of the UK. Strikingly, it has made clear that it would prefer to see Netomnia bought by CityFibre, a Nexfibre competitor that has been an outspoken critic of the deal.

Even more strikingly, it has also expressed the opinion that CityFibre would acquire Substantial, Netomnia's parent, if the current deal were blocked. As it states in the summary of its interim report on the merger, "our provisional view is that the most likely counterfactual is an acquisition of Substantial by CityFibre, with a subsequent sale of Substantial's retail businesses to a third-party ISP [Internet service provider]."

Regulators commonly weigh such counterfactuals when deciding whether to approve a planned merger. Conventionally, however, this would mean simply assuming the market continues as before. "The choice of counterfactual was surprising: In doing so, the Competition and Markets Authority may have signaled (if not in words, but at least in effect) how it wants the fiber market to develop, which doesn't feel like what its review should do," said James Robinson, a senior analyst at Assembly Research, in a LinkedIn post.

On top of this, CityFibre is known to have been outbid for Netomnia by Nexfibre. Simon Holden, CityFibre's CEO, apparently wanted to offer more but did not receive the necessary backing from his investors. Those circumstances make the nature of the CMA's intervention look even more unorthodox, as if the CMA is trying to steer the market toward a preferred scenario in which one private-sector company succeeds at another's expense.

'Frankly surprising'

Shellshocked observers included Rajiv Datta, Nexfibre's CEO. "They're supposed to consider a counterfactual. It feels like they've considered a counter fantasy, and that counter fantasy they have includes this view that CityFibre would do a series of things," he told Light Reading. "It is frankly surprising that the CMA would take the view that something that actually could have happened but did not happen would happen in the future."

A regulatory preference for a deal involving CityFibre seems predicated on the idea it would have a less negative impact on competition. One problem with Nexfibre as an acquirer is that it is 50% owned by Liberty Global and Telefónica, the parents of Virgin Media O2 (VMO2), one of the UK's big three consumer-facing telcos. Treating the VMO2 and Nexfibre networks as a single entity, the CMA notes that 14% of its full-fiber footprint is overlapped by Netomnia. Overlap between CityFibre and Netomnia, by contrast, is "minimal."

Consequently, the proposed deal would leave customers in some areas with a wholesale choice between only Openreach, the BT-owned incumbent, and a VMO2/Nexfibre that has been strengthened by its Netomnia takeover. Were CityFibre to acquire Netomnia instead, those areas would continue to feature competition between three wholesale providers.

Yet all this seems quite pernickety. Essentially, the CMA is objecting to a deal that could produce a stronger wholesale player for more than a quarter of UK homes because it would shrink the options for a few hundred thousand at most. When Datta spoke with Light Reading in March, after the deal was announced, he reckoned the Nexfibre and Netomnia full-fiber footprints overlapped across only about 200,000 homes. More recently, Assembly Research said there was overlap between VMO2/Nexfibre and Netomnia across 540,000 homes in XGS-PON, a high-speed fiber technology.

Arguably a much greater concern for the CMA is BT's proposed takeover of TalkTalk, a struggling retailer of broadband services, announced earlier today. While it would rescue TalkTalk from administration, it would give the UK's dominant broadband player another 2.5 million customers and eliminate the fourth-biggest retailer after BT, Sky and VMO2.

Openreach or nothing

In the meantime, vast swathes of the UK continue to lack a wholesale network alternative to Openreach. Evidence of that can be seen in the premises-passed figures disclosed by the big providers. That Netomnia deal would leave Nexfibre on fewer than 6 million, while CityFibre does not even reach 5 million. Nor is there a wholesale market for hybrid-fiber coax (HFC), the technology still mainly used by VMO2. Openreach is literally streets ahead with almost 23 million at the end of March.

The real problem is not the prospect of a wholesale choice between VMO2/Nexfibre and Openreach across half a million homes. It is the choice of Openreach or nothing for millions. As heavily regulated as Openreach may be, the emergence of competition would be a preferable safeguard against monopolistic behavior.

Years since the "altnets" first began digging roads and climbing poles, that has not really happened. Openreach still served 19.3 million broadband customers at the end of March, having lost about 1.9 million in the preceding two years. "Logically, with this position by the regulator, their share should go down from x to y, and I would argue that they're nowhere near where y should be," said Datta at a breakfast briefing in June.

There are other problems with the CMA's review, as well. It observes that "Substantial's financial outlook has deteriorated in recent years, and whilst it was a viable option to continue as a standalone entity, this was not attractive compared to a sale at an acceptable valuation." That bleak review seems bound to hurt Substantial's future valuation and will not do much to attract investment in the UK.

The CMA's other counterfactual is that VMO2/Nexfibre "would continue to upgrade its cable network to FTTP [fiber-to-the-premises] and would also wholesale this to ISPs." But earlier funding problems at CityFibre and a slowdown in the pace of its rollout surely prove there can be no such guarantees. CityFibre added 800,000 premises in 2024, reaching 4.4 million by the end of that year. But its footprint grew by fewer than 600,000 in the subsequent 18 months.

Nexfibre's own buildout pace has also recently slowed, while VMO2 is burdened with debt and reported to be targeting about £600 million ($793 million) in cost savings. An assumption that fiber investment will continue looks suspect. "One point that may still be debatable is whether VMO2 will upgrade its network from cable to fiber," said Karen Egan, the managing director of telecoms at Enders Analysis, in a LinkedIn post. "The CMA seems to believe that it will whether this deal happens or not, which may not be right."

Years of altnet activity have left much of the UK crisscrossed with loss-making fiber lines and weakened the appetite for laying even more. But stitching all that into a handful of competitive and profitable ventures is turning into a major challenge.