Now a For Sale Sign at AboveNet Too?

May 24th, 2011 by · 12 Comments

Reports today say that abvt has retained JP Morgan Chase in order to find a buyer, with potential suitors mentioned being Level 3 Communications (NYSE:LVLT, news, filings), TW Telecom (NASDAQ:TWTC, news, filings), and several private equity firms.  AboveNet operates one of the premier Tier 1 metro footprints on the market, covering 15 of the very largest markets and expanding into a half dozen more with fiber connecting more than 2,600 buildings.  On top of that they're profitable and growing at a nice clip - something that doesn't come up for sale every day in this business.  Let's take a closer look at these and other potential suitors:

Level 3 - Considering its pending purchase of Global Crossing, the possibility they might make a parallel bid for AboveNet seems a bit remote.  They need GLBC and they don't need ABVT, so why risk it?  However, such assets don't stroll by every day, and I suppose it's possible that Level 3 will find the opportunity irresistable.  But it's not compelling to me.

TW Telecom - On an asset basis this would make a lot of sense.  TW Telecom's biggest weaknesses, if it has any, are its lack of depth on the east coast and its comparatively weaker performance in the largest markets relative to the next tier down where it dominates.  Buying AboveNet would bolster their position on both fronts.  The question is, given their conservative nature, will they be willing to pay a large enough premium to make it happen?

Private Equity - Last year private equity bought into lots of metro fiber assets, many of which had been underfunded relative to what is required to really bring out the value.  That's not really true of AboveNet, which has been consistently spending some 30%+ of revenue on capex.  I think a strategic buyer with revenue to put on all that metro fiber would make more sense, but if one doesn't show up then these guys certainly will be there.

CenturyLink - Recently a commenter suggested them as a potential buyer for XO, but I think there's a better chance they could go after AboveNet and pay up to do it.  The Qwest longhaul assets long suffered from a lack off off-ramps, and purchasing AboveNet would end that storyline quite efficiently while giving the company a much more compelling asset base with which to attack the large enterprise market.  The synergies from their existing revenue base seem large, and they have the resources to pull it off as well.  This is actually my top pick.

Verizon - the former MCI assets don't go everywhere, and adding AboveNet could help Verizon Business with that flagging wireline business.  They probably won't as they don't need the antitrust headache, but there's no question they could outbid almost any other if they wanted too.  AT&T on the other hand is busy with T-Mobile.

Comcast - Of all the cable MSOs, the one that might pull the trigger on a big metro fiber buy would be Comcast.  They'd have to want to, and I sort of doubt they do, but they could.

Others seem less likely - It's hard to make a case for other combinations.  If Icahn and XO weren't so busy with their own soap opera, a combination there might be viable - but no.  Windstream doesn't seem to fit, and Zayo, Earthlink and PAETEC simply don't have the firepower.  Internationally, none of the big players seem interested at this time.

Now, on a certain level all this makes sense.  AboveNet has expressed the belief that asset prices were higher than they'd wish to pay to expand.  And it's true that the prices being paid for privately held metro fiber assets have been rather higher than the broader market has been giving publicly traded metro fiber assets, and this is one way to explore getting such a higher valuation.  However, because such a move by AboveNet would be opportunistic, it's going to take a big premium to make it happen.  I think it's equally likely that the mere discussion of such a deal's potential will raise the market's awareness of the company's assets but that the rumored deal will not materialize.

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Categories: Mergers and Acquisitions · Metro fiber

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12 Comments So Far


  • LVLT had a big day too.

  • Brian Scully says:

    Keeping them all straight, how many are rumored and/or confirmed to be on the market?

    Fiberlight
    Abovenet
    Sidera
    Alpheus
    NStar

    Am I missing any?

    • Rob Powell says:

      NStar is gone now, they sold an IRU for all unused capacity to Lightower in early January. I haven’t heard anything about Alpheus since last spring. The others seem to have left a more recent trail with the money guys.

      The for-sale breadcrumbs leading to Zayo are more dubious. The CLEC Broadview Networks is almost certainly for sale, though that’s a different kind of asset.

  • nuhbuddy says:

    It looks like they primarily have metro fiber assets… any idea if they have long haul fiber assets too? (or do they lease/IRU long haul stuff for their network?)

    • Rob Powell says:

      Abovenet’s intercity fiber comes from an IRU swap deal with (I believe) WilTel from long ago (now Level 3 of course). Therefore they do have some, but their primary asset is definitely the metro miles.

  • carlk says:

    Hmm, Google moves to close the doors on future co-lo tenants in the heart of Manhattan Island, and Abovenet announces their interest to sell. No connections, Rob?

  • Jillian says:

    When will one of the large European carriers make a move to buy a US asset?

  • en_ron_hubbard says:

    Rob,

    When you mentioned Private Equity as a potential buyer I was initially skeptical. But I just ran a simple LBO model against an acquisition at $90 per share ($2.3 Billion EV) and it generates four year returns in the 16-28% IRR range. This assumes an exit at a 9-12x EBITDA range, 14% revenue growth, tax shelter for all pre tax cash flow and leverage at 5x EBITDA. That is a doable deal. It’s the growth that makes it work.

    • bob says:

      what are you assuming for capex growth? doesn’t look like a great deal to me given their capex spend as a % of revenue

      • en_ron_hubbard says:

        bob,

        I assumed CapX at a constant 30% of revenue. Leveraged at 5x it doesn’t generate meaningful FCF but the debt could be structured so as to accomodate that. This is a viable PE deal.

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