Ok the initial surprise of the Zayo/AboveNet announcement has worn off, so here are a few additional thoughts on the implications of the deal.
It’s hard to overstate the impact of Zayo gaining this amount of fiber depth in Tier 1 markets. The company has been disruptive within its footprint, but has until now had relatively limited assets to play with in key places like New York City, Los Angeles, Chicago, San Francisco, and Dallas. National operators, both competitive and incumbent, could therefore partially ignore their challenge to the status quo. If this deal goes through, they will no longer be able to.
The combined company will have more than 8,000 on-net buildings, within shooting distance of the exclusive five figure competitive club. Both companies were already spending high levels of capex for expansion, but on different things. Zayo was adding hundreds and hundreds of towers to its network, while AboveNet was adding rings in a half dozen new markets organically.
AboveNet’s intercity assets are mainly leased fiber pairs on the former WilTel backbone (now Level 3). They will give Zayo better connectivity in the SouthEast, although this will still be one of their weaker areas outside of Atlanta, where they are one of the largest already.
In addition to the fiber, Zayo is getting one other interesting asset out of this deal that I didn’t mention before: a substantial IP transit backbone. It’s not one that AboveNet competes heavily with in wholesale, but it does have substantial scale (top 20 according to Renesys, as I recall). I expect Zayo intends continue to follow AboveNet’s path for this asset.
For the current quarter, AboveNet is expected to turn in revenues of about $124M with about $58M in adjusted EBITDA. Meanwhile, with a full quarter of revenues from the 360networks purchase and most of one from MarquisNet, I estimate Zayo to turn in revenue and adjusted EBITDA of $105M and $51M, respectively. The combined company after eliminations but before synergies looks like it weighs in at right around $910M in revenue and $435M in EBITDA currently on an annual basis. Add in some growth this year, and it probably tips the scales at $1B in annual revenue by New Year’s 2013.
The fit is excellent. Zayo’s business is mostly of the wholesale variety. AboveNet has focused on enterprises for some years now, but only the largest ones and mainly out of data centers. AboveNet has focused more and more on WAN services, while Zayo more on infrastructure. There’s enough overlap to make it easy to integrate, yet enough differences to offer plenty of opportunities for revenue synergies.
The multiple appears to be 9.2x projected 2012 EBITDA. That’s a solid multiple, although not a dramatically huge one compared to what some privately held companies have raked in over the past two years. I think it’s a measure of how much AboveNet’s current main owners wanted to cash in, since they had been in this since the dot com crash. It does perhaps leave room for a higher bid, although since AboveNet has been available since last summer it’s not as if alternative buyers didn’t have a chance already. More on that another day.
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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber
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Rob,
One other observation on valuation– the estimated multiple of FY ’12 EBITDA (9.2x) is stated before estimated cost synergies. They didn’t give an estimate since Zayo is private and therefore they didn’t need to. However, if you take the mid point of previosly announced synergies in other deals in the past three years– which would be ~ 13% of cash OpeX, you get another $36 million in pro forma Fy ’12 EBITDA. This would reduce the multiple paid to ~ 8x.
I agree that TWTC should take a look, but this seems a little rich for them. Another name is CTL but what gives pause is that at this price it would be materially dilutive. Below is a snippet from a very recent Citi report based on a meeting with CTL management:
“We believe
CTL is likely to be a net buyer of metro-fiber assets over the next 6-18 months & a net
seller of its wireless spectrum assets. CenturyLink’s strategic interest in metro-fiber and
comments around improving product demand for metro-ethernet services may help
perception for fundamentals and valuation for Buy-rated TW Telecom as well as for
Neutral-rated Cogent and Level 3. We believe TWTC retains positive option value as a
possible acquisition candidate, as larger wireline Telcos (CTL and/or WIN) and the
cable MSOs, seek to increase their business revenue exposure within the Telco sector.”
Who buys who no-one can tell, but what seems sure is that consolidation in this space will continue.