Zayo Continues Fiber Binge With $1.4B Bid for Electric Lightwave

Fiber network operator Zayo is to add extra muscle to its US network with a $1.4 billion takeover of smaller competitor Electric Lightwave.

The acquisition, which is to be funded through a mixture of cash on hand and debt, will give Zayo Group Inc. (NYSE: ZAYO) more than 12,000 miles of fiber in the west of the country, including the cities of Portland, Seattle and San Francisco.

Zayo sells fiber-based connectivity offerings to a range of customers -- including fixed and mobile telcos, enterprises and public sector bodies -- and has been rapidly expanding its footprint in North America and Europe in response to rising usage of data and video services. (See Zayo Sees the Light in Europe's Dark Fiber.)

Its move is the latest in a series of takeovers in the US fixed-line market, following CenturyLink Inc. (NYSE: CTL)'s $24 billion move for Level 3 Communications Inc. (NYSE: LVLT) in October and Windstream Communications Inc. (Nasdaq: WIN)'s $1.1 billion deal for EarthLink Inc. (Nasdaq: ELNK) earlier this month. (See CenturyLink Splashes $34B on Level 3 Buy and Windstream Buys EarthLink for $673M.)

"Part of our original investment thesis was that, although there were a lot of fiber properties in the year 2007, we saw a future where that would consolidate into a much smaller number of fiber-based properties," said Dan Caruso, Zayo's CEO, in commenting on the consolidation trend during a recent earnings call (see this Seeking Alpha link for a full transcript).

Zayo reckons about 40% of Electric Lightwave 's sales neatly align with its existing infrastructure-focused activities and says the remainder complements its SME (small and midsized enterprise) and voice businesses in Canada, where it has been active since buying local operator Allstream Corp. in January.

Zayo also hopes to realize about $40 million in annual cost savings from the latest takeover, which it expects to complete between January and March next year, subject to regulatory approvals.

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The fee of $1.4 billion is about eight times the annualized EBITDA of Electric Lightwave, which is based in Vancouver and claimed to serve around 5,400 customers in August.

Zayo currently generates about $2 billion in annual sales and $1 billion in annual EBITDA and has completed a total of seven takeovers in the last two years.

The acquisition spree has led to a sharp rise in Zayo's long-term debt, which now equals about four times annualized EBITDA, although the company says it has "ample liquidity" and does not have to refinance borrowings until 2021.

Shares in Zayo were trading up 1.1% on the New York Stock Exchange at the time of publication and have risen by 34% since the start of the year.

— Iain Morris, , News Editor, Light Reading