I talk to a lot of ISPs, and many who operate mature fiber networks have been recently approached to sell their businesses to buyers who want to roll up and amass multiple fiber networks into a larger business.

Periods of industry consolidation are not new. I can remember times when there were roll-ups of small cable companies, independent telephone companies, dial-up ISPs, CLECs, small cellular carriers, long-haul fiber networks, paging companies, and long-distance companies. Inevitably there is one or more companies that see a value proposition from combining multiple smaller companies in a given industry.

I know fiber network owners who are being offered prices for their business that they never expected. I’ve heard of a few offers for fiber ISPs at a multiple in the range of twenty times adjusted earnings. Obviously, only the most ideally situated fiber networks are seeing offers that high, but multiples are up everywhere.

It wasn’t too long ago when the top multiple for a fiber provider was in the range of ten to twelve times earnings. Any time that multiples in the industry shoot upwards is a sign of a superheated demand to buy existing businesses. High multiples stem from buyers who are competing to buy a limited number of existing businesses.

High multiples are also a sure sign of plans for rolling up many ISPs into a larger business. It makes little sense to pay a high multiple for a single ISP. It’s unlikely that one ISP can be changed enough to generate earnings that will justify the high multiple. Think about what a multiple of twenty times earnings means. That price means a buyer is pre-paying at a level that represents profits at current levels for the next twenty years.

A buyer is only willing to pay a large multiple if it is sure that the high purchase price can be justified. A buyer has to expect several things from buying an ISP at a high multiple. It must believe the purchased business can expand sales and revenues to increase margins. The buyer must believe that it can slash overhead expenses through the consolidation of multiple ISPs using one backoffice. And likely, the buyer hopes that buying a good ISP at a high margin will increase the multiples for its existing ISP businesses – buyers who pay high multiples are likely looking to flip the business.

Current high valuations are also a sign that the broadband industry has attracted large equity investors trying to buy into the market. Many of the high bids for existing ISPs are coming from equity investor groups trying to get a foothold in the industry. It seems likely that the original impetus that attracted investors to the industry today is the big influx of grant funding that is helping to pay for broadband infrastructure. Between BEAD, other federal grants, and the many state and local grants from ARPA there has been significantly more than $100 billion of free equity being given to ISPs to build last-mile broadband infrastructure.

I have to honestly chuckle if that’s what the equity investors are chasing, because they’ve never looked hard at a rural grant-funded ISP. Even with grant funding, the typical rural fiber market is never going to generate significant margins. This is due to the high cost of construction, the high-than-average ongoing maintenance costs for networks that are far apart, and the relatively low number of customers to generate revenue. Every ISP that operates a rural fiber network will tell you that the business will eventually create a modest return and will generate cash over the long-haul. But rural markets that don’t work without grant funding are, by definition, never going to be highly profitable even with grant funding. These businesses are not good candidates for a roll-up since the margins are so tiny and predictable. We already know what a roll-up of rural businesses looks like. Just look at the history of CenturyLink and Frontier – companies that own large numbers of rural customers scattered over large areas.

All market booms eventually come back to earth, and the characteristics of operating last-mile networks will never sustain permanent high multiples – the underlying math is not there. This is not to say that some of the folks currently chasing acquisitions won’t be clever enough to find profit in buying, consolidating, and dumping ISPs. But a lot of the investors are not that clever and will get stuck with assets that will never justify the purchase price paid.