Well, they managed to keep this one secret from me. In a blockbuster announcement this morning, privately held metro fiber operator Zayo Group (news, filings) is buying its larger publicly held neighbor, abvt. The purchase price will be approximately $2.2B, or $84 per share. That’s a 13% premium above AboveNet’s closing price on Friday.
The purchase will give Zayo a laundry list of things it did not yet have after nearly 20 prior acquisitions. First, their presence will become truly national, as AboveNet’s intercity backbone goes down to a young metro fiber presence in Miami. Second, it will give them a full Tier-1 presence, whereas they have only dabbled in most of the big markets thus far. Third, it will give them a foothold in Europe – a strong London presence plus the assets AboveNet has recently been building out on the continent.
Zayo will of course be raising money to make this purchase. They will be gaining at least one new private equity partner, as Chicago’s GTCR will be putting money into the company, and CharlesBank Capital will be adding more to its position. Meanwhile, Morgan Stanley and Barclays will be supplying debt financing.
But it’s not quite a done deal yet. AboveNet has a 30-day “go-shop” provision, in which it can solicit other buyers. Now that Zayo has made its bid, I wonder if other bidders will jump off the fence – tw telecom comes, nay leaps to mind.
More later when I’ve had a chance to fully digest this news.
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Categories: Mergers and Acquisitions · Metro fiber
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That transaction value, based on a quick look, translates into about 11.6x trailing FY ’11 EBITDA and 9.2x the mid point of FY ’12 projected EBITDA. (I used the mid point of the EBITDA target for managment bonuses as set out in the 10K for the FY ’12 #). Those are encouraging multiples when applied to companies like LVLT.
While differnet business model then Zayo/Abovenet Carl Icahn and XO must be very happy at the moment. Looks like a level 3 Tw telecom fight into the summer to acquire that asset and the cost may have just gone up.
Although Level 3 countering Zayo to Purchase Abovenet may not be an unlikley scenario. Level 3 has a large amount of leased fiber with Abovenet and may not want that to fall into Zayo hands.
Your joking right? This is a positive for Level 3. Look at Enron’s post above regarding the EBITDA multiple’s. Also, you need to be more specific about “large amounts” of leased fiber.
Do you happen to know how much fiber/waves Abovenet leases on their longhaul network and from whom? Also, I don’t undertsand your logic on XO as Icahn would have taken $2.2 billion in cash for XO.
If anyhting, this tells me that there’s not much under the XO hood as Zayo was mentioned as a potential suitor for XO.
Maybe Icahn should try speed dating?
Abovenet and Level 3 lease from each other in various places and in various ways. I don’t think Level 3 is likely to try to stop Zayo’s purchase here, because the benefits are outweighed by the more difficult metro integration which would come at the wrong time. They still can’t afford to have the Global Crossing integration go awry.
While a hot M&A market would help Icahn get a better price, the drawbacks probably offset the benefits for him. If Zayo doesn’t get outbid, they will have no further need for XO and they probably would have been an aggressive bidder as they were in the past.
value of XO may be higher based on this transaction and Ebita multiple which would make XO happy. That is the point.
I believe that the match in business plans Zayo Fiber services and Abovenet are far better match for Zayo then XO. That leaves Tw and Level 3 to perhaps battle for the assest XO
I dont know LH leased network amount for Abovenet, I do know in metro space Level 3 leases alot of fiber from Abovenet. I cant quantify either amount to balance the Abovenet lease from Level 3 to the Level 3 lease from abovenet, we can agree it is large in both directiosn with a guess that Level 3 leases and spends more money with Abovenet then Abovenet lease from Level 3.
Almost all of AboveNet’s US intercity fiber is leased off the WilTel backbone, now Level 3 of course. In the metro, Level 3 probably leases more from AboveNet than vice versa.
Sadly the local markets in which Zayo operates are losing customers because they are not focusing on customer service yet acquisitions. Poaching Zayo customers is common place with its competitors.
Discounting en_ron_hubbard’s telecom investing knowledge anywhere in cyberspace is akin to discounting ddm08 when it comes to satellite technologies and/or video compression; one does so at their own peril.
It’s the same reason I would leave shorting CCOI to, “The Dark Side of the Looking Glass” players like Stevie Cohen who is long en-ron’s “little company” if I recall correctly versus being SHORT notwithstanding the loss of its largest customer being under house arrest!
It’s not by accident that en_ron_hubbard’s target for Level 3 is higher than Seam’s at least over the next two years at $75 pps before this announcement.
Do not miss the fact that a “private company” has found it in it’s best interest to pay a “higher multiple” than was currently being ascribed to a “public company.”
No “PUBLIC PREMIUMS” only “DISCOUNTS” there!
This multiple equates to a conservative LVLT share price at $40 pps today, versus Seam’s $60 pps “valuation model” tied to IV in real time.
Temporary congrats to Dan Caruso, the Kiewit Mafia, and The Buffett Rules of investing! imo, of course. 🙂
Dan Caruso … congratulations to you. A great business pick up if successful.
Thank you Grant!!
why would you value xoxo higher because of the abvt deal when xoxo’s iru with lvlt runs out in 7 years. lvlt has hinted they wont renew it so i am a little skeptical this helps them because they down own what they want to sell? abvt does
Thank You, Todd…..
Icahn needs to dump his XO piggie before the IRU slaughter in 6 years…The closer he gets to the slaughter, the less payment his pig is going to fetch
Congrats to the AboveNet team on a great exit. They built and run a great company that customers really like.
One thought that comes to mind is that Zayo is effectively doing the leveraged recap that wall street wanted AboveNet to do (see recent filing). To a wall streeter, it makes sense to lever up these “consistent cash flows” and expand ROE. However, Above has consistently described a more conservative approach – perhaps due to painful memories of the 2000 MFNX, etc era. What happens with the cost of debt goes up?
I still don’t follow how Zayo can pay a premium and use private equity at a high cost of capital (even with leverage) to roll up a assets bought at multiples that imply an 8 cap (or similar). I really hope the answer isnt “synergies”.
Perhaps some of the industry veterans on this site can walk us through the approach?
“I still don’t follow how Zayo can pay a premium and use private equity at a high cost of capital (even with leverage) to roll up a assets bought at multiples that imply an 8 cap (or similar)”
Growth makes it work. They probably assume they can get the same exit multiple as their entry multiple, revenue is growing something like 5% and EBITDA is growing 10% thanks to operating leverage. With leverage that combination will produce at satisfactory equity IRR (20%+) .
Whether these business grow at that level is an open question but the math isn’t complicated.
Thanks. Don’t think that answers it. Even if there is growth, one needs to account for the premium paid, the higher cost of capital and (to some extent) the new capital required to fund the growth (e.g., new lit buildings, routes, etc). We’ll see, but this looks like a levered bet that simply spends in M&A amounts which used to be the margin of error
like I said, the math isn’t complicated.
get an LBO model and see what the equity return is if you have 5% revenue growth and 10% EBITDA growth and your exit multiple equals your entry multiple.
BTW, I’m not saying this is a good assumption, but the ‘premium paid’ is assumed away when you assume your exit multiple is the same as your entry multiple.
for example, if you assume your entry multiple is 8x and the exit multiple is 8x, that’s going to produce the same return as a case where the entry multiple is 15x and exit is 15x, assuming you hold everything else constant.
No one said the math was complicated – not sure what that saw proves. As you note, the assumption is an assumption and maybe a stretch (the multiple exceeds other comps and is higher than above was able to get in a well attended auction).
But even if you assume the same exit multiple, still hard to find any value creation (by exit, i assume we mean a partial sale in an IPO, because it seems unlikely that VZ/T/CTL trading at half the multiple take this out).
Your form LBO model does not address the delta in cost of capital — private co has higher WACC – equity and debt costs. The business also consumes capital to fuel the growth you are assuming.
So, back to where we started, it is hard to see how a smaller private company/roll-up with a higher cost of capital creates much value buying and levering up a larger and [already] well run public company. Please identify a single telco LBO where this play worked ?
Now that is a question that I want to hear the answer to.
Jed
“Your form LBO model does not address the delta in cost of capital”
“get an LBO model and see what the *equity return* is”
the equity return == the equity component of your WACC.
As I told you, revenues and EBITDA growing at 5% and 10% respectively with 50% leverage will produce a 20% equity IRR, which is your typical PE hurdle.
Anyway, I don’t have a dog in this fight. You want to understand the math, go play with an LBO model.
It seems like you want to say it’s a bad idea. OK. It could be. I obviously mistook a rhetorical question with genuine curiosity about how a PE firm would look at this.
Zayo has been able to integrate very well thus far. Look at their ebitda margins. Among the highest in the industry. I would guess they are counting on much higher growth than your assumptions. Consider bandwidth consumption is growing 40% y/y and the industry is consolidating which *should* mean more pricing power for the survivors.
I like this mgmt team. How many companies can you say that about in telecom? I can’t think of another. The rest are legacy Bell, Worldcom, etc. They don’t have the right pedigree. Why do you think Zayo has been able to line up the financing??? It is the mgmt team.
Disclosure – No affiliation with Zayo at all.
Zayo publishes a lot of detailed financial information on our web site and walks through the info on our quarterly earnings calls. Flip through the earnings supplement. For those who want to roll up their sleeves, an LBO model can be derived based on the first 5 years. That is, you can estimate the IRR our equity owners have enjoyed to date based on the actual performance of the company over the past 5 years. We bought companies at ~8-9x EBITDA on average, so it is analogous to your question.
In the end, most financial models are just bundles of assumptions that try to predict the unpredictable. The value they provide is in helping to understand what the critical components are and measuring incremental progress.
The thing here is that Dan Caruso, Zayo and the private equity guys behind them are out there trying to build something. They believe the fiber is worth more than what current models say it is if you use it correctly. They’re trying to prove the naysayers wrong and are putting their own money and sweat and tears behind it. Right or wrong, it’s their dime and their play to make — and their fortune to build if they can.
Rob, I disagree with you. Financial models are much more essential than you seem to view. Experienced operators and investors have the opportunity to more accurately predict future cash flows than others. Money is made or lost based on this ability. It is the foundation of Warren Buffett’s investment philosophy and of all good value / long term investors.
Dan,
You probably know but WEB has never ‘modeled’ a company the way Rob implies. Sure he has operating, mental and financial models in his head but does not use a spreadsheet b/c as he has said, if he needed one – he isn’t interested.
I’ll side with Rob here and say more money is made or lost understanding the critical components and measuring progress than in tightly modeling the financials. The point is false precision is one of the most deadly sins of an investor. Many investors talk about it but my favorite illustration is the Mark Twain quote on the broader topic, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
SI
Todd and the Real Anonymous – Have you even read the Cost Sharing and IRU Agreement between XO and Level3? I have no love for XO so this ‘aint no rah-rah XO shillin’ post, but here’s $0.25 — you might wanna buy a clue concerning how the IRU is structured, particularly the provisions re: title.
I have a few questions I hope someone can answer:
1) Roughly how much of XO’s longhaul is dependent on L-3’s iru’s.?
2) Does XO have any right to renew the lease or is renewal at the complete discretion of L-3?
3) Does L-3 lease metro fiber or wireless spectrum from XO? If so, in what quantity?
Thanks in advance if anyone has this info.
XO has zero renewal rights & doesn’t have the capacity to move all their traffic to their owned fibers.
Re: #2, Brian, it’s not a lease, it’s an IRU, and all accounting treatment and revenue recognition issues aside, it’s neither fish nor fowl. The better question you should be asking yourselves (the answer to which I know but won’t tell you) is not whether the term of the IRU may be extended, but whether and to what extent the agreement allows XO to take title to the fiber. ‘Nuff said.
Whilst an IRU may be neither fish nor fowl and – equally importantly – there can be many varieties of IRU – in most cases an IRU will resemble a lease in the sense that the property will return to the owner upon expiration.
An long-term IRU will resemble a asset purchase from an accounting persective in the sense that it can be capitalised (and depreciated) rather than sitting as COGS, but that doesn’t mean that the purchaser will “own” the asset once the value is written down to zero. At the end of the day, think that the fibre and optronics wou’d still be owned by Level 3 and theirs to redeploy elsewhere as they see fit. I’d actually be pretty surprised if this wasn’t the case, as otherwise how would this transaction be distinguished from a straight fibre sale and network management deal?
It’s not entitled a “Cost Sharing and IRU Agreement” for nothing. When the network was built roughly 15 years ago at a cost of approximately $1 billion, the costs were shared, with XO ponying up several hundred million samolians. Do you really think XO paid all of that money to help build a network that they only had the right to lease back for a finite period of time? I can’t (won’t) go into more specifics, but suffice it to say this was not your typical deal and many of the folks on here and elsewhere that like to talk smack have likely never even seen the agreement, much less read it or understand its intricacies.
According to CNN/Money XO’s predecessor-in-interest, InterNext, purchased $700 million in capacity from Level3…so you do the math….
Ok, here’s a link to the original agreement: http://contracts.corporate.findlaw.com/operations/services/3167.html As far as I can tell, the cliff does not exist, this is not an ordinary IRU – as Eponymous said.
It’s important to also note that this agreement was amended in 2003 when XO was in Chapter 11. In exchange for lower O&M and an option to purchase 25% of the fibers in the next conduit filled, XO gave up the conduit and 6 of its 24 fibers.
But this whole discussion is a bit surreal. By the time it starts to matter, this fiber will be 20+ years old and new, more advanced fiber will have been blown. If at that time XO still exists and wants to keep paying O&M to LVLT for a fully depreciated asset that is at an economic disadvantage next to the new one, then I say LVLT will take that money and be happy about it.
The only question here is about the remaining option to purchase 25% of the next fiber blown, and specifically the terms/price of that option/purchase. That’s what LVLT would probably try to play hardball with, and it’s that option they’d probably like to bring back in-house if they can at some point.
eponymous. thanks for the comment. yes i have read the agreement. my comments were based on what lvlt said about a year ago when xoxo was shopping themselves around. as for your comment i should buy a clue i will take that as a compliment.
i think the question is how “accommodating” will lvlt be when this agreement runs out. i am sure you remember lvlt tried to stop xoxo from using infineras gear to light the network (they lost that battle in 07) and that was not something anyone anticipated when this agreement was written. in essence lvlt was f’ing with them. how will they interpret article 5 in what are their obligations after this is over. how will the f with them again. i also wonder if they would consider blowing fiber in a “nonlvlt” conduit to get around the 25% sharing agreement you mentioned.
eponymous, do you think ichan has no use for xoxo’s losses to offset his gains (generated elsewhere) and thus the downsizing of xoxo to get to cfbe happened this year. i am not talking about the old nol’s he took awhile back but the yearly losses he can use (in a consolidated return) to offset any gains.
Don’t waste your time parsing Article 5, Todd. Look instead at Article 3, particularly 3.02. The key to untying this Gordian Knot is not not what happens at the end of the term, but what happened at the very beginning, and what the parties’ intentions were in making the agreement. One could argue that XO actually owns the fiber at this very moment.
To your point, Level3 was clearly “f’ing” with XO concerning whether XO could light the LH fiber for its own use. (3)’s arguments were lame and the court saw right through them. Personally, I think that’s where this whole thing end up, unless of course (3) buys XO. If it’s anyone else, at some point in time they’re going to buy themselves a few months in court over this issue, and I think Level3 loses again, but you can’t ever predict what some crazy judge will do.
Concerning the NOLs, the IRS code is, as you might imagine, quite complex and I am simply a dilettante when it comes to such matters, but my general understanding is that it is not as easy to take advantage of the NOLs as one might think (and I don’t think it’s a dollar-for-dollar match, but rather a percentage of losses that one can use), and therefore even if Icahn could use the ongoing NOLs, any incremental benefit to him would probably not be that useful or be more valuable than if XO were actually profitable (not just from a profits perspective, but from an overall valuation perspective).
thanks for your response.
Wow! Zayo strikes again!…………http://www.zayo.com/news/zayo-group-acquire-arialink