CityFibre tries to break free of Vodafone handcuffs

Fibre cables

One of BT’s challengers in the race to upgrade Britain to full-fibre broadband is attempting to tear up its exclusive partnership with Vodafone as part of a bid by its new owners to accelerate progress.

CityFibre, which was taken private for £538m in 2018 by Antin Infrastructure Partners and Goldman Sachs, is in talks to radically restructure a contract it signed two years ago. It grants Vodafone exclusive rights to sell broadband on the first phase of its new network.

Under the current terms, CityFibre is unable to wholesale access to its first million full-fibre lines to Vodafone's rivals while they are being built.

The condition was originally negotiated by Vodafone in an attempt to boost its broadband business, which trails far behind the major retailers after arriving late to the market.

However, CityFibre is now at risk of losing out on major contracts as a result of the exclusivity clauses and is seeking concessions from Vodafone.

In exchange for allowing TalkTalk and potentially also Sky to use the full-fibre lines, Vodafone due to get improved commercial terms, two industry sources said.

Vodafone is trying to catch up to rivals in the home broadband race

The talks, which are at an advanced stage, are a crucial part of plans by CityFibre to acquire FibreNation, a subsidiary of TalkTalk that has built a full-fibre network in York. That sale was shelved hours before it was due to be announced this month when Labour revealed plans to nationalise BT’s network arm Openreach and offer universal free broadband.

The deal is understood to value FibreNation at £200m, providing TalkTalk with a much-needed cash boost to ease its heavy debt burden.

Sources said CityFibre has agreed to the generous figure in part exchange for an undertaking from TalkTalk to move swathes of its 4.3m broadband customers off the Openreach network and on to the clusters of new lines it is building across the UK.

Antin and Goldman have said they will invest £2.5bn to connect 5m home with full fibre by 2025. The more retailers CityFibre can attract onto its network the greater its backers' returns will be.

City and industry sceptics point to estimates suggesting CityFibre has connected fewer than 200,000 homes, with one senior source branding its efforts as “competition by Powerpoint”. By comparison, Openreach is due to pass the two-million milestone next week and is connecting tens of thousands of homes each week.

Vodafone believes that allowing rival retailers to share the infrastructure early may help CityFibre survive and thrive as viable competition to Openreach. The pair's original deal was planned on the assumption that a million full-fibre lines would be built within four years, but that now seems unachievable.

Sky represents a potentially even bigger prize than TalkTalk for CityFibre if it redraws its contract with Vodafone. Earlier this year the Comcast-owned operator invited bids from full-fibre infrastructure owners to underpin faster and more reliable services for its 6.2m broadband customers.

Virgin Media, the cable operator, is also competing to offer wholesale access to its network to Sky for the first time.

Such a move deal be a much greater threat to BT and Openreach than a deal with CityFibre, as cable already covers half the country. Philip Jansen, BT’s chief executive, has warned that the loss of millions of lines would damage Openreach’s full-fibre investment plans.

Sky has been attempting to use its market heft to extract preferential commercial terms from wholesalers, but Openreach and CityFibre have both have resisted, saying they must offer all broadband retailers the same basic prices.

No major developments are now expected until after the election given the threat to private investment from Labour's free state broadband pledge.

Vodafone and CityFibre declined to comment.