While data centres – driven by the global AI fever – are currently triggering the next gold rush, investors are becoming increasingly disillusioned with other digital infrastructure. Although Germany is catching up internationally in terms of fibre optic penetration, the growth momentum is noticeably slowing down.

„The entire industry has challenges when it comes to civil engineering,“ says industry pioneer David Zimmer, a member of the Deutsche Glasfaser advisory board. There is sometimes a „two-year wait for expansion.“ Though he described recent rumours that investors in the second-largest fibre optic company in Germany have tried to divest parts of the company as „completely unfounded.“

Deutsche Glasfaser has an expansion target of 6 million homes passed, but this is not expected to be achieved until 2030. So far, the provider has connected 4.2 million homes. Well over 5 billion euros is to be invested.

Zimmer is aware that crisis symptoms are increasingly to be seen in the industry. „Anyone who works with a penetration of 25% in an expansion area cannot earn back their investment,“ says the manager, emphasising that Deutsche Glasfaser is on average operating at 50%, sometimes even higher. Nevertheless, the prospects in Germany as a whole have clouded because the areas that are not yet served are increasingly subject to a patchwork, making it difficult to connect and scale the business. „Organic growth“ is therefore proving to be „more and more difficult in the industry because more and more areas are already being planned for expansion and Deutsche Telekom is strategically building over competitors, but M&A is complex,“ says Zimmer.

With interest rates rising in recent years and growth slowing down, valuations are already under pressure. According to experts, multiples of between 15 and 18 based on operating profit before depreciation are still possible, but at the same time are a pipe dream for many smaller players. The larger players who could consolidate the market are hesitant. „The integration is so complex that taking over a company with fewer than 100,000 potential customers is generally not worthwhile,“ says Zimmer.

Infrafibre Germany, which reportedly changed hands for a symbolic euro at the end of last year, is said to have only had 50,000 customers. The company was swallowed up by UGG, which is backed by Allianz Capital and Telefónica as investors.

Christoph Forster, partner and restructuring expert at Strategy&, expects that a streamlining of the industry „could follow a similar pattern to that in Great Britain“. There, in addition to several bankruptcies, there were also takeovers by private equity.

When buying up struggling fibre optic companies, financial investors benefit from „the fact that they have a completed infrastructure and stable processes directly at their disposal – that is attractive,“ emphasises Michael Weiß, also a partner and restructuring expert at Strategy&.

But the much-vaunted consolidation is not a panacea, he says. On the one hand, many smaller market participants in Germany „still do not scale to a measurable level,“ and on the other hand, „further gaps in the business model“ sometimes appear, for example in content marketing.

Refinancing is becoming a growing challenge for many companies in this capital-intensive business. The interest rate reduction cycle recently introduced by the ECB is not helping much. „Interest rate cuts are not enough if the business model was originally based on zero interest rates,“ says Weiß. In addition, „lenders and investors have sharply tightened their leading indicators.“ In a difficult economic environment, banks are increasingly concerned about loan defaults. In the fibre optic sector, a risk premium is already due because 1-euro deals such as the one at Infrafibre, or significant bankruptcies such as those of Glasfaser Direkt or Hello Fiber are setting off warning lights.

The Globalconnect Group, which previously operated in northern Germany, is also pulling the plug. The company, which is primarily active in Scandinavia, is „setting new priorities in growth markets“ that Germany will no longer be one of in the future. An exit without a buyer may become more common. EY Parthenon expects a wave of consolidation in the fibre optic industry in the coming years, with only around 90 of the current 260 providers, including countless small municipal utilities, likely to remain.

Meanwhile, in the eyes of Sören Grabowski, partner at EY-Parthenon, the progress in expanding fibre optics appears to be somewhat „embellished“. The „homes passed“ figure is also misleading because the mere development of streets „does not generate any real cash flow,“ says the expert. The so-called take-up rate, on average in the industry, is only 25% and „perhaps 10% is actually in use“. Even if observers never tire of emphasising the „steadily and long-term increasing need for bandwidth,“ demand is only picking up slowly. „Many customers do not need that much bandwidth today, the corresponding applications are lacking and therefore the willingness to pay is lacking.“ From Grabowski's point of view, the lack of organisational experience and the growth-related process problems of many providers are doing the rest to slow down market development.

The market could get a boost from „terminating Telekom's copper network or from new products that rely on the performance of fibre optics,“ says the manager. This has happened in some other countries, creating more pressure for transformation. In Germany, however, such a move is not foreseeable. Grabowski also believes that consolidation is inevitable but difficult. In addition to Telekom, which is facing antitrust hurdles, the major players include Deutsche Glasfaser and Deutsche Giganetz. The latter is backed by DWS and the international infrastructure investor Infrared Capital Partners. Even for these companies, which have solidly positioned their financing – in the case of Deutsche Glasfaser and Deutsche Giganetz, also with broad-based borrowing from a large consortium of banks – a business model that ensures good network utilisation is still in its infancy. Wholesale, i.e. the leasing of network capacity to third parties, is not even getting off the ground by the larger players. „The negotiations are complex, pricing, technical interfaces and other issues are hindering progress,“ says Grabowski.