Windstream (NYSE:WIN, news, filings) is buying itself a bunch of fiber! Today the rural ILEC announced that it has agreed to purchase Kentucky Data Link (KDL) as well as Norlight from Q-Comm. The transaction is valued at approximately $782M, the components of which will be 20.6M shares of stock, $278M in cash, and the repayment of $267M in net debt. From what I hear, this was not Windstream’s first offer, but rather its third. Additionally, there were active private equity bidders in the mix, but Windstream won out in the end.
For that price, Windstream picks up over 30K miles of fiber spanning 22 states and 500 PoPs that connect up many of the ILEC assets they currently have. Readers may remember that KDL was known to be for sale, and actually one reader left a comment here suggesting Windstream as the buyer. Indeed, Windstream seems like an ideal buyer because it can derive synergies from the unique geography that no private equity company might. Also, KDL’s assets already are aimed largely at central offices throughout the region, as opposed to a deep metro fiber footprint focusing one a few markets in depth.
The KDL/Norlight assets generated $231M in revenue and $92.8M in OIBDA. That gives us a nice clean EV/EBITDA datapoint of 8.42. That’s a pretty good valuation for a regional fiber asset like this, while the more focused metro fiber footprints might draw bids at a bit higher ratio. Windstream expects to derive another $25M in operating synergies, and intends to increase success-based capex with a particular interest in wireless backhaul.
KDL and Norlight have about 600 employees between them, but I’ll bet that headcount isn’t one of the bigger synergies that Windstream is looking for. Rather, this purchase seems to dovetail quite elegantly with last year’s purchase of NuVox, in that Windstream will now have an extensive fiber-based CLEC business that complements their ILEC business geographically and gives them a true regional presence. I wonder if they have further M&A in mind, I still think Deltacom looks like a fit, perhaps even moreso after this deal.
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Categories: CLEC · ILECs, PTTs · Mergers and Acquisitions
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Regional players getting 8x multiples on annualized EBITDA… wonder what AboveNet could fetch with its unrivaled deep metro network? 10-12x?
The only pure play publicly traded metro fiber company… My bet is they will see a bid soon.
Rusin, you agree?
I have publicly stated before and agree that metro network depth is more valuable than regional networks IF said metro networks are in significant size markets — third/fourth/fifth tier markets sort of lose their luster and any significant demand growth no or in the future.
That’s as close as to anything I can say at this time. But then again, I have always believed that metro networks place you closer to the customer and by that fact alone provides for a competitive advantage over those who commodity transport between metro areas …
I have yet to see a voice, data, video, image application originate or terminate in a regional network, long haul network or oceanic network.
He whom is closest to the customer wins.
AboveNet … my opinion … not for sale — they are in a great position for predictable results for years to come.
Now, if someone offers 20x versus the time and cost to build what AboveNet has and the premier markets they serve … I would imagine Bill would consider it.
Third/Fourth/Fifth tier markets I pretty much put a 0 X EBITDA on them. Why? no upside, no growth. higher cost/unit served, etc. Different animal, that’s why RLECs should be looked at differently.
While the RLEC’s don’t have all the sexy growth projections put out by the rest of the Telco space, they also have the advantage of operating in a monopolistic environment. While the rest of the Telco’s play a game of musical chairs where the music stops every couple of years and all those little sheep go running for but a few chairs.
Abovenet tried to sell themselves to us about 12-18 months ago. Asking price, $1Bn. How we laughed.
Their marketcap is now $1.3B, and that’s after falling since the spring, $1B would have been a steal.
Anon – What type of company do you work for?
As mentioned at the end of Bob’s post – this deal leads me to believe that Windstream will be looking at Deltacom very soon. With their move into a large, if regional fiber provider – it seems like a strong possibility to complement that footprint with 16,000 fiber miles primarily in the southeast.
What are the general thoughts from the group about Deltacom’s likelihood of joining the Windstream network?
Seems very logical. I doubt KDL is the last deal.
Of course, if it does happen, the EV/EBITDA ratio isn’t going to be 8.42! 🙂 Deltacom is a very different beast, even if it does seem to fit the puzzle Windstream is putting together.
Rob – What about Deltacom is so different from the previous Windstream acquisitions?
While they have some interesting fiber assets, their revenue base has a very high concentration of legacy voice and T-1 that doesn’t benefit as much from it. That revenue mix has been shifting over the past year, but has a long way to go. They’re closer to NuVox in type than the other purchases.
So, you see Deltacom as still a potential target, but the valuation would have to be there more for the fiber assets than the existing business (which was the primary reason along with footprint expansion in the NuVox purchase, IMO).
In that case, if they devalue the business revenue and really only want the fiber, would Windstream have to over-pay for the assets in order to satisfy Deltacom’s board and investors?
Secondly, on a potential acquisition scale of 1 to 10, where does Deltacom fall (in your opinion) as a target for someone – whether it’s WIN or someone else?
Deltacom has never been given a premium compared to others with fiber in the sector, their EV/EBITDA is below 5. Offer them 6 and they might take it.
On a scale of 1 to 10, I’d give them a 7. Strategically it makes sense form them to be involved in consolidation and I think they know it. But they aren’t a must-have for anyone, if it happens it will be opportunistic – and IMHO Windstream may find the most synergies from such a deal.
But of course it takes two to tango, and right now there’s just me and my vote doesn’t count.
Have you listened to the 2nd qtr Deltacom CC. I think it was their first earnings CC in four or five years. I am interested in what you take from it.
Are you saying that Windstream got fiber assets from its Nuvox purchase? Because AFAIK Nuvox wasn’t a fiber company, just lots of CO builds, mainly from its merger with FDN.
No, they didn’t get fiber from NuVox that I know of. But so much of the revenues of Deltacom are of a similar type from similar customers.
Nuvox had some fiber, IRUs for some small rings in the South and Midwest. But not much.
As others have stated I doubt KDL is the last deal and Deltacom may well be next. My take is WIN is trying to keep from being acquired by CenturyLink and if that’s inevitable increase their valuation in advance.