Zayo Closes the AGL Deal, Wins Some More Stimulus Funds

July 5th, 2010 by · 4 Comments

Following up on its agreement to buy AFS, Zayo had quite a busy few days leading up to the July 4 holiday weekend.  First of all, they closed the AGL Networks purchase and gave a bit more detail in the process.  As expected, the deal brings some 270 on-net buildings and 850 route miles of fiber to the Zayo footprint, spread across the three markets of Atlanta, Phoenix, and Charlotte – in that order of size.  Financially it will add some $160M in total contract value, $17M in annualized revenue, and $9-10M in post-synergy EBITDA.

That jives fairly well with estimates I reported for the purchase price of roughly $70M and 9xEBITDA, which would correspond to $7.5-8M EBITDA pre-synergy or about 45% EBITDA margins – par for the course for this type of asset.  Zayo also estimated the replacement cost of the AGL Networks assets at $100M, in other words stating that buying was cheaper than building.  AGL’s business was purely dark fiber, whereas Zayo’s is both dark and lit.  It seems likely that they will be lighting that fiber, though I’m curious as to the fit with the Atlanta network of AFS once that deal closes.

Secondly, they managed to win yet another substantial broadband stimulus grant, as they were among the $795M in grants announced by President Obama.  Zayo Bandwidth’s stimulus application was for middle mile access in counties just outside of the Minneapolis/St.Paul metro area.  The project will cost some $19.1M, of which Zayo Bandwidth will contribute $5.7M, and will add 300 miles of new fiber network to the area.  The new connectivity will benefit some 360K people, 11K businesses, and 700+ community institutions.  Zayo has proven quite deft at these stimulus projects, with this one following up their $31.8M pickup in Indiana in round 1.  It seemed to me that this batch of successful stimulus projects was weighted toward FTTH in one form or another, with nonprofits and small, rural independent telephone companies picking up most of it.

Third, Zayo added two more independent directors to its board:  Rick Connor and Don Detampel.  The former is from KPMG with experience working with companies in the media, telecom, and energy sectors, and will chair the audit committee.  The latter was executive chairman at New Global Telecom, which was sold to Comcast in February.  What with all the M&A activity and major corporate events, being on Zayo’s board is probably rather interesting relative to some others.

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Categories: Government Regulations · Mergers and Acquisitions · Metro fiber

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4 Comments So Far

  • Anonymous says:

    Board appointments a precursor to an IPO? This must be in the cards at some point.

    • Rob Powell says:

      I think an eventual IPO for Zayo is very likely. However, given the M&A environment in the short to mid term, perhaps they prefer the flexibility of being private and therefore less transparent.

  • Anonymous says:

    Same week they announce the closing of AGL and the purchase of AFS, they are awarded Stimulus $13m grant. What happens when govt. money runs out and losers start complaining about which winners received the funding?

  • anon says:

    Rob, the numnbers you site are interesting — with them, one can start to frame or answer the “reckless roll up” vs “savvy compilation” debate asked here recently. (On this topic, see also:

    Of note, if you are correct that zayo paid 9x ebitda for this asset, it implies an 11% unlevered cash on cash return to the buyer (and, of concern, the “post synergy” description implies it may actually be a higher price and lower c/c return, pre synergy).

    So the above frames the “Uses” of the capital raise. the “Souorces” shows their recent debt raise was at 10.25% which shows their cost of incremental captial. their WACC is substantially higher, as they are PE funded. And no one is lending them 100% of the capital required for these purchases.

    As such, and without knowing more, there seems to be very fair question here as to whether zayo is simply raising 15-20% (or whatever) capital to buy 10% returns. This is not a recipe for success (historically, folks that pursue this strategy ultimately run into balance sheet concerns, even if purchased “ebitda” looks to be growing).

    The TMC blog (linked above) even raises the “how do they pay the note back” question, although one would need more data to consider that question. Clearly, these are fair questions to the latest & fast growing roll up, that wins every auction vs well capitalized and profitable competitors. Several historical examples of this strategy not ending well…

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