The past few months has brought a steady drumbeat of transactions in the Metro Fiber sector with the acquisitions of Freedom Dark Fiber out in Southern California, US Metro down in Florida, Access Communications in Minneapolis and EasyTel in Tulsa. We sat down with Bank Street Group’s James Henry (JHH), Richard Lukaj (RSL) and Peter Beckett (JPB) to discuss the implications of these recent transactions for the sector and the outlook for the future.
TR: What is the most important lesson to be learned from the recent round of fiber M&A transactions?
JHH: Certainly one important takeaway from the most recent round of transactions is that there continues to be very broad-based buyer interest in core fiber assets. Between the four most recent transactions, you have a new Pamlico Capital-backed metro fiber platform (WilCon), an international cable company (Cable Bahamas) making its first U.S. acquisition in this sector, the largest fiber consolidator in the U.S. (Zayo), and the third largest cable MSO (Cox) making its first fiber acquisition.
TR: What does the high volume of M&A activity in the sector over the past few years mean for the remaining players?
RSL: There are at least two important implications to the consolidation that has played out in recent years. First, the remaining players should enjoy a rationalized competitive environment with fewer competitors, benefiting cost of customer acquisition, margins and return on invested capital. Second, the scarcity and strategic value of the remaining players has been greatly enhanced, potentially making them more appealing to the large universe of potential buyers that remain focused on the broadband transport sector.
TR: What have the valuation characteristics been in the recent transactions? Are there any material changes in the approach of buyers to valuation?
JPB: Valuations remain very healthy in the sector with the fairway for EBITDA multiples being the high single-digit to low double-digit range depending on the company. The biggest driver of valuation in M&A transactions continues to be run-rate EBITDA at closing plus booked-but-uninstalled backlog with further credit for perceived synergy potential either from cost savings or growth upside. The depth of fiber asset inventory, network capacity for future growth and relative uniqueness of the physical plant are also key factors.
TR: In spite of all the recent deals, Broadband Transport M&A volume is still down year-to-date. Why do you think that is the case?
JHH: You need to bear in mind that 2012 was a record year heavily influenced by two transactions: Zayo’s acquisition of AboveNet and Berkshire’s acquisition of Lightower and Sidera, which totaled more than $3 billion. Another significant catalyst for deal activity last year was the anticipated change to the long-term capital gains rates. If you look at year-to-date activity in 2013 in comparison to 2011 and 2010, it looks fairly standard with a steady flow of small and mid-sized deals with some much larger transactions waiting in the wings.
TR: In light of the remarkable amount of M&A activity in the sector over the past five years, how many players are left?
RSL: We track a universe of more than 100 broadband transport companies, inclusive of metro and regional fiber operators, inter-city transport providers and niche players in areas such as E-Rate, Wireless Backhaul, etc. While the M&A activity in recent years has thinned the number of companies, it’s a massive industry with more than $40 billion of annual revenue in the U.S. from broadband services and room for many players. We think the opportunity for pureplays in this sector remains as compelling as ever.
TR: Aside from the fiber players focused on enterprise and carrier customers in the top tier metro markets, do you see any new areas of focus or interesting niche markets?
JPB: There are a number of areas were we see new and interesting growth opportunities. In particular, many of the secondary, tertiary and rural markets remain under penetrated and offer significant growth opportunities with relatively benign competitive dynamics compared to the larger markets. We also see the education market under the FCC's E-Rate program as a tremendous opportunity, particularly in light of recent initiatives by the Obama Administration to significantly enlarge the size and scope of E-Rate funding.
TR: Thank you for talking with Telecom Ramblings!