Zayo's AboveNet acquisition is all about quenching the metro fiber thirst

Sean Buckley, FierceTelecomZayo Group went to the acquisition well again by making its 19th and 20th deal in the span of its short five years--first acquiring AboveNet on Monday and then, with the ink still wet on the AboveNet transaction, reaching a deal to acquire Arialink to expand its presence in the Michigan market.

Clocking in at nearly $2.2 billion, the acquisition of AboveNet (NYSE: ABVT) is the largest in Zayo's history.

The deal also attracted GTCR, a Chicago-based private equity firm, which will make an equity investment in Zayo.

The deal with Zayo emerged after a report last October that it was thinking about expanding its reach through possible acquisitions. At that time a number of financial and telecom analysts argued that AboveNet itself be a good acquisition target because it has been profitable.

So what does Zayo get out of the deal?

By acquiring AboveNet, a company that has a similar focus in terms of providing high bandwidth fiber-based connectivity to demanding large business segments such as finance and other service providers, Zayo will not only deepen its metro fiber footprint, but also access into key European markets.

From an asset standpoint, AboveNet instantly adds both 2,800 on-net fiber enabled buildings and 2.3 million worldwide fiber miles to its existing footprint.

"They're very much in a business like ours and there are a lot of similarities between our businesses," said Glenn Russo, EVP of Corp. Strategic Development. "We're both very focused on fiber-based services and we also don't do voice or managed services."

Russo added that the AboveNet's network is complementary to its own, and there's no overlap.

"Domestically, they have deep fiber network in New York, New Jersey and Chicago, which are places where we have network presence but it's not that deep," he said. "On the other hand, Zayo has deeper fiber networks in Phoenix, Las Vegas, and Minneapolis so we have depth in markets where they don't have a lot of depth."

Of course, its acquisition of AboveNet is far from a done deal. The agreement includes a 30-day "go-shop" provision allows AboveNet to talk to other suitors about proposals to purchase the company.

Some of the likely suitors that could make a competing bid for AboveNet could include, but are not limited to CenturyLink (NYSE: CTL), Level 3 Communications (NYSE: LVLT) and tw telecom (Nasdaq: TWTC).

CenturyLink could use AboveNet to flesh out its fiber network as it expands its own focus to serve larger businesses. However, the reality of incurring more debt and taking on yet another network and integration job while in the midst of integrating its Qwest and Savvis assets might not be the best choice at this time.

Likewise, Level 3, a company that was actually co-founded by Zayo CEO Dan Caruso, would instantly gain a deeper metro footprint, but like CenturyLink is still in the midst of integrating the former Global Crossing into its fold.   

Finally, tw telecom, which certainly is much larger than Zayo yet one of the most conservative service providers on the M&A front, might also bolster its domestic and international fiber network and service reach. The competitive provider, while not ruling out possible deals, said recently in an investor conference that it has been mainly focused on creating a profitable business selling fiber-based Ethernet and related service carried over networks it is building on its own.  

Regardless if Zayo or another service provider prevails in buying AboveNet, Craig Clausen, EVP of New Paradigm Resources Group, Inc. (NPRG), believes the deal signifies a new metro fiber acquisition wave.

"Faced with increasing bandwidth demands from business customers and understanding that Ethernet provides an efficient mechanism for addressing this demand, service providers are focused on weaning themselves off of Type II copper-based connections," Clausen said in an interview with FierceTelecom. "While Ethernet over copper provides a mid-band bandwidth option, getting beyond this range will require fiber. And providers want customers directly connected to their metro fiber network (i.e. on-net) for a range of reasons."

Growing its fiber network via acquisitions continues to be a trend for Zayo and its moves to acquire AboveNet and a regional service provider like Arialink are representative of that trend.

But whatever the eventual outcome of the AboveNet deal is, the reality is that the so-called "fiber glut" trend of the .com era is behind us and service providers are moving, both organically and through acquisition, to respond to the insatiable need for bandwidth.--Sean