In Zayo’s earnings call this week, Chairman and CEO Dan Caruso was asked about the prospects of Zayo’s further consolidation in the US fiber sector. The gist of it was that with Crown Castle entering the game and EBITDA multiples rising ever higher, has Zayo’s roll-up finally run into a steep enough hill to slow it down? The stock was down afterwards despite solid earnings apparently on such worries, but it seems overblown to me.
The ever-shrinking field of available fiber assets is clear enough evidence, however it’s not exactly an unforseen phenomenon. All successful roll-ups have to reach that point, it’s sort of a part of the definition. The question is, what does Zayo do when its traditional M&A targets get scarce or too expensive even for them? How does a business founded on the idea of a roll-up change in response? Here’s a piece of Dan’s response, in which part of the answer is actually pretty clear:
We’re always asking ourselves where is that next set of opportunities, not looking backwards and saying what worked three years ago is the only thing that could work today. It’s good to see that a lot of people think that these [fiber] properties are worth a whole bunch of money. The one thing that won’t change is that we’re focused on an infrastructure strategy. Infrastructure is what we’re all about, infrastructure is how we think about the world, we love investing in assets that have decades worth of life to them, whether they be strictly fiber-based assets, interconnect-based assets, data-center-based assets — but assets that have a strong foundation and work together. That’s not going to change.
The other thing that’s not going to change is that we’re going to prosecute multiple business strategies that each have to stand on their own feet through the strategic product group structure. They each have to create value in their own right, but they leverage each other. That won’t change either. I expect us to continue to be acquisitive. That’s our nature, we’re good at it and I think you’ll see us continue to be effective.
I think this says pretty clearly that Zayo is looking to continue its roll-up, just across a broader set of potential infrastructure assets. Note that Dan put data center assets on par with the fiber and interconnection assets that Zayo has primarily been interested in historically. Zayo has only really made one move on that side so far — this year’s purchase of Latisys — and it seems clear it was not a fluke. In response to a later question, Dan suggested that consolidation in the data center business is at an earlier stage of the game. In other words, it’s still a target-rich environment.
Now that doesn’t mean I think we’re going to see Zayo bid for Telecity too. Rather, I think we would want to look for Zayo’s next targets in the sort of less traveled places they assembled their fiber network in. Yes, I’m thinking about the growing trend of content moving toward the edge into Tier 2 and 3 markets.
That’s not to say there aren’t a few fiber deals in Zayo’s future yet, as I still feel there will be at least a couple more big regional possibilities and more in Europe. But what we’re probably already seeing is a shift in the company’s strategy toward organic growth of the fiber business augmented by inorganic growth of both their interconnection and raw colo square footage throughout that fiber footprint.
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