More than £1 billion was wiped off the stock market value of BT Group after Sky struck a deal with one of its biggest competitors to supply fibre broadband to households throughout Britain.

The long-term deal with CityFibre, the UK’s largest alternative network provider, or “altnet”, was seen in the City as a potential blow to BT and its Openreach internet division.

At present, Sky uses Openreach’s network to supply fibre broadband to its six million internet customers. From next year, it will start using CityFibre’s network as well.

Greg Mesch, the founder and chief executive of the London-based CityFibre, said winning Sky as a customer “had been our game plan for 13 years. They were always clear that they liked what we were doing, but they needed us to have scale and we’ve proceeded to go about that.”

BT shares fell by as much as 8 per cent in afternoon trading, wiping more than £1 billion from its £14 billion market valuation.

At the moment, CityFibre reaches 3.8 million premises nationwide, but it is hoping to increase that to eight million by the end of next year. Only 10 per cent of the areas served by CityFibre are also served by Openreach, potentially allowing Sky to start offering ultra-fast broadband to hundreds of thousands of customers to whom, at the moment, it can offer only copper broadband.

“Sky’s new partnership with CityFibre will mean we are able to reach even more people with full fibre, which is essential for the modern home,” Amber Pine, the managing director of connectivity at Sky, said.

Nick Lyall, a telecoms industry analyst at Bernstein, said the tie-up “puts more pressure on Openreach. It adds potential line losses, it hands CityFibre a financial lifeline and it ensures competitive tension in the wholesale market.” On his calculations, Openreach could lose 500,000 copper broadband lines if existing Sky customers switch to a fibre package. “The question, in our view, is how quickly Openreach can roll out fibre to cover off the risk,” he said.

“We’re very confident that Openreach will continue to be the UK’s fibre partner of choice,” a BT spokesman said. “[The CityFibre-Sky deal] was expected as the UK’s fibre broadband market becomes ever more competitive. But we’re building fibre faster, more efficiently and providing better customer experience than anyone.”

CityFibre, which is backed by Goldman Sachs and Abu Dhabi’s wealth fund, is the oldest of the altnet providers, having been set up in 2011. It is the third largest broadband firm, behind Virgin Media O2 and BT Openreach, which remains by some way the industry leader, with its fibre broadband available to more than 15 million homes and businesses in the UK.

Openreach is reaching about a million new premises every quarter and is targeting 25 million by the end of 2026. CityFibre has made a point of trying to roll out its fibre broadband network in remote and rural areas that Openreach has not yet reached. As part of the government’s “Project Gigabit” programme, CityFibre is the principal broadband supplier to 1.3 million hard-to-reach homes and businesses.

Openreach’s rapid rollout in recent years has made it difficult for the altnets to eat into its market share. In its most recent set of accounts, CityFibre fell to a loss of £210 million in 2022, almost double that recorded in 2021. This was largely down to the increased cost of servicing its £1.8 billion of debts.

There are dozens of altnet providers and there is an expectation within the industry that, given the tough competition, there will soon be some consolidation. Mesch, 64, confirmed that he was open to growing the business through acquisition. “We would expect to go a little quicker on the acquisition front now this [Sky partnership] is out of the way,” he said.

Shares in BT were down by 9¼p, or 6.4 per cent, at 136¼p at the close, valuing the business at £13.5 billion.