Zayo mulls paths to continued growth
Acquisitions or not, the Boulder-based provider of fiber, data centers and associated services figures to keep growing, even if only organically. The world's thirst for high-speed fiber optics, after all, has grown exponentially in recent years. There are few signs of that changing any time soon.
"When these networks were built (in the 1990s), nobody even thought of smartphones, didn't even know they were going to exist," said Glenn Russo, Zayo's executive vice president for corporate strategy and development. "Nobody had even thought of tablets. And what's it going to be in five years? I don't know. But I bet it's something that's going to need a lot of bandwidth."
To keep up, Zayo is going to need more funding, making the likelihood of an initial public offering for the private company high. Company executives have acknowledged that they're exploring the possibility in the next year or two.
That doesn't mean an IPO is a given. Zayo's board could consider a buyout if an offer came along. The company also could raise more private equity. It has raised more than $700 million in three rounds since 2007. Such a decision ultimately will rest with the board and shareholders, Russo said.
Russo admits, however, that adding a fourth round of equity would be complicated at this point given the company's size. Also, the company's investors – which include Oak Investment Partners, Columbia Capital, MC Partners, Centennial Ventures, Battery Ventures, Charlesbank Capital Partners, Morgan Stanley Alternative Investment Partners, and GTCR LLC – will at some point want liquidity.
Depending on the metrics used for determining the value of the company, Zayo's latest investor presentation estimates that $700 million in equity now is worth $2.4 billion to $6.3 billion after debt is subtracted.
Zayo reported revenue of $273.6 million for the second fiscal quarter ended Dec. 31, meaning annualized revenue of $1.1 billion if extrapolated over a full year.
"They're right at this critical point of a billion dollars in revenue," said Erik Mitisek, chief executive of the Colorado Technology Association. "I think where they're at today, the public markets open up some additional opportunities to raise capital to continue on their acquisition track that they've been on."
Zayo's fiber optic network spans 45 states and seven countries, and includes 77,000 route miles of fiber. The company is part of a booming telecom industry in Colorado that includes Broomfield-based giant Level 3 Communications Inc. (NYSE: LVLT) and Greenwood Village-based TW Telecom Inc. (Nasdaq: TWTC), not to mention operators such as Century Link, Verizon and Sprint, which all have major fiber networks in the state.
For comparison, Level 3, with 2013 revenue of $6.3 billion, has a market cap of $8.8 billion, based on its March 14 closing share price of $37.23. TW, with 2013 revenue of $1.6 billion, has a market cap of $4.3 billion.
"We won't know until we go public what people think we're worth," Russo said.
It's hardly luck that Zayo has reached this point.
Founder and chief executive Dan Caruso was a founding executive of Level 3. He led a buyout of ICG Communications in 2004, rescued the company from the brink of its second Chapter 11 bankruptcy filing, and sold it two years later to Level 3 for $170 million.
Some of the same investors who were part of the ICG turnaround helped start Zayo in 2007 with an initial funding round of $225 million that led to five acquisitions in that first year of operations.
Zayo's recipe largely has been to purchase "fiber orphans," or companies launched during the telecom boom of the 1990s – before there was enough bandwidth demand to support all of the fiber optic networks being built – that have a single or limited market and were perhaps doing OK but couldn't thrive as a standalone entity. With Zayo, the companies gain synergies as well as relationships with large customers, from wireless carriers such as AT&T and Verizon to media and content providers such as Google and Netflix.
"Having led acquisitions and having been in the industry so long, Dan has a sixth sense as it relates to opportunities," Mitisek said of Caruso.
Another key piece of Zayo's success, Russo said, has been in the way the company rapidly integrates its acquisitions, quickly transitioning employees to Zayo's systems.
"Doing it quickly and getting it 85-plus percent right is much better than trying to be perfect at it and taking a year or two to do it," Russo said.
Of that annualized revenue of $1.1 billion, $890 million is attributable to acquisitions and $204 million to organic growth. The company doubled in size in 2012 with the acquisition of AboveNet, which brought nearly $500 million in revenue to the ledger.
Still, not everything has been about acquisitions. Organic revenue growth has been about 9 percent per year, and plenty more is coming in Colorado alone.
Only two of Zayo's acquisitions have been Colorado companies. Zayo landed its first significant network in Colorado in 2008 with the purchase of Denver-based Adesta. At first centered mostly around downtown Denver, Zayo's Colorado network now stretches up and down the Front Range from Colorado Springs to Fort Collins.
Zayo has 728 route miles of fiber in Colorado, with 300 more under construction and another 400 in planning. The in-state expansion includes a heavy presence in Boulder County as Zayo builds out networks for a pair of large customers that Russo said he couldn't disclose.
"The good news is the Front Range is filled with companies (needing more bandwidth)," Russo said. "Not to mention Boulder and Denver have very active startup and technology communities, and we think it's a really good environment for us to be here."
Much of Zayo's work in Colorado includes replacing copper wires to wireless carriers' towers with fiber as those carriers rush to increase the data capabilities of their customers' smartphones and tablets. But the space continues to evolve.
Instead of large cell towers that cover maybe five square miles, some carriers are going to several small cell towers that might cover a couple of blocks each to reduce the number of people drawing bandwidth from each tower.
Each of those small cell towers needs to be connected with fiber.
"We still have a lot of work ahead of us," Russo said.
Joshua Lindenstein can be reached at 303-630-1943 or firstname.lastname@example.org. Follow him on Twitter at @JoshLindenstein.
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