M&A Journal: AboveNet and Cogent?

A few weeks ago, there was speculation that abvt might be shifting toward a buyer’s stance in the M&A arena and I gave some thought to a few possibilities.  But there is one other candidate that I didn’t even look at, but which on second thought may make the most sense of all:  Cogent Communications (NASDAQ:CCOI, news, filings).  No, I’m not kidding – think about it:

• On-Net buildings — The net-centric buildings will overlap heavily, but the enterprise buildings will not.  Cogent’s targeted buildings are very large multi-tenant office buildings where they sell to many smaller customers.  This business is complementary to AboveNet’s large enterprise and bandwidth intensive enterprise focus.  It would add a new dimension to their revenue opportunity while leveraging the same assets.
• Metro footprints — Cogent’s metro footprint is made up of mostly leased fiber, leased from AboveNet in some cases.  In existing AboveNet markets, Cogent’s network would often differ only in the case of those laterals to enterprise buildings.  But in other markets, Cogent’s metro footprint would be an instant ‘starter set’ for AboveNet from which they could expand into Tier 2 markets with a running start.  Cogent has a bunch in Toronto, for example, where AboveNet is currently planning to enter.
• Intercity — Both companies lease intercity fiber for the most part, but often from different builds and via different routes.  The combined US assets would have greater route diversity and substantial synergies.  In Europe, Cogent’s extensive network would complement AboveNet’s expansion onto the continent, giving them the scale to move into additional major metro areas beyond their initial ring.
• IP transit — Both companies compete in the wholesale IP transit business, with Cogent being the larger and the more aggressive.  With the LVLT/GLBC and CTEL/Q/Savvis deals, the ‘who has sufficient scale’ equation has clearly changed in this sector.  The combination of AboveNet and Cogent’s backbones could give both a scale boost that could be quite relevant here.
• Integration — Both companies operate with a very streamlined portfolio.  There’s little or no legacy CLEC stuff, low margin voice, or older data products to worry about merging onto a unified, more complicated back office.

The combined company would have AboveNet’s very deep Tier 1 metro presence, a solidly top-10 IP transit backbone, a serious starting entry into a dozen or two tier 2 markets, 4000+ on-net buildings, a full intercity fiber network stretching from California to the Ukraine, $800M in annual revenue, 40%+ EBITDA margins, and positive earnings and cash flow.  It’s a combination that I find hard to ignore.

That’s a strategic view of the assets. But there’s also the fact that prices for privately held fiber operators have had a premium relative to where their publicly held cousins trade.  This has made it harder for public companies to justify participating in metro fiber M&A – it’s hard to pay 10x or 11x EBITDA when you’re trading at 7.5xEBITDA.  But Cogent is public, so there is less dissonance on that front.

Now, there are obviously hurdles, not the least of which being that both companies are profitable, growing, and generally very comfortable with their competitive position.  Neither *needs* to make a move, and which makes it rather more likely either will.  I have always tended to dismiss Cogent as an M&A target, but in terms of raw attractiveness such a deal makes at least as much sense to me as the other possibilities being floated out there.

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Categories: Mergers and Acquisitions · Metro fiber