Yesterday's announcement of the intended purchase of abvt by Zayo Group (news, filings) included a "go-shop" provision under which AboveNet has 30 days to seek a higher offer. The followup question therefore is who might make a bid? There are several strategic buyers who have the means and the motive to go after these assets, but for each there are also reasons why they probably won't.
- Level 3 - While on one level they would love to get their hands on these metro assets, it seems unlikely that they would buy so much additional metro fiber while in the midst of the Global Crossing integration. And while their cost of capital has come down with their new scale, raising $2.2B to buy $250M in EBITDA would take their leverage in the other direction. To put it simply, they might want it but they don't need it and hence they aren't likely to risk it.
- CenturyLink - The assets would be a great fit for CenturyLink (NYSE:CTL, news, filings), as their metro depth beyond their ILEC footprint is weak. But the multiple is simply too high for them to justify given their own, and they're still busy with Qwest and Savvis. Additionally, the direction doesn't really fit their current cloud/enterprise intentions.
- Windstream - Combining the PAETEC and AboveNet assets is a concept I have never really considered. I suppose it might work on paper, but the two businesses had very different focuses and would be hard to merge. And as with CenturyLink, it doesn't really further their current plans and the multiple doesn't jive with their own even after cost savings.
- tw telecom - Larissa Herda & crew are by far the most likely to actually make a competing bid, and in fact last summer they were rumored to be close to a deal themselves. They are much larger than Zayo and would probably find it easier to both finance a deal and to integrate the assets. AboveNet's assets fill tw telecom's Tier-1 and intercity holes quite nicely, and the synergies would be substantial - probably better than for Zayo given the greater combined revenue. But on the other hand, AboveNet's data-center-centric enterprise business has less overlap with tw's mid-sized enterprise customer base. And tw's conservative bias will probably keep them out of a bidding war, leaving them with XO in their sights.
- Private equity - Zayo's bid comes from private equity of course, and from the most aggressive fiber-buying private equity in the market. If there was a competing group out there, you'd think they'd have moved already.
- Comcast - Could a cable MSO move in on this deal? Yes, but it's unlikely. They've never shown this level of interest in such assets, and to go from idle to a $2.2+B bid in 30 days isn't going to happen.
- AT&T, Verizon - If either giant magically were to re-acquire an interest in buying fiber assets, they could do it in a heartbeat (after a brief war with the FCC). But don't hold your breath.
Final Thoughts - So it basically comes down to historically conservative tw telecom deciding to enter a bidding war that they already backed off from last summer rather than turning their attention to their potentially great fit with a cheaper XO in a couple quarters. Zayo probably wins this one, unless something extraordinary happens. Anyone have alternative possibilities?