Editor’s Corner: Zayo's ELI purchase solidifies its indie fiber position, but SMB business hangs in the balance

trench dug for fiber
Similar to other recent acquisitions, Zayo's ELI deal is another fiber land grab.

Sean Buckley, FierceTelecom

Zayo entered the frenetic fiber M&A fray this week, reaching a deal to acquire Electric Lightwave for $1.42 billion, a deal that will further its identity as the largest independent fiber provider in the United States. 

Similar to other acquisitions that Zayo has made in recent years, the Electric Lightwave (ELI) deal is another fiber land grab.

ELI has 8,100 route miles of long haul fiber and 4,000 miles of dense metro fiber in Portland, Oregon; Seattle; Sacramento, California; San Francisco; San Jose, California; Salt Lake City; Spokane, Washington; and Boise, Idaho, with on-net connectivity to more than 3,100 enterprise buildings and 100 data centers. 

Zayo will also use the additional fiber to also bolster its ongoing fiber-to-the-tower builds.

Electric Lightwave has had a storied evolution. Initially founded in 1990 as a Competitive Access Provider (CAP), the service provider was acquired by Integra Telecom in 2006 and its fiber network was used to support Integra’s SMB traffic.

Beginning in 2011, Integra began the transition to a fiber-focused business model targeting larger businesses and wholesale opportunities with wireless operators and content providers. A key focus of that effort focused on extending the dormant ELI fiber assets.

As Integra completed the fiber-centric business transition, the company revamped the Electric Lightwave brand in August 2016 after spinning out the fiber-focused side of the company while retaining Integra Telecom's focus on the SMB market. 

Analysts were not exactly surprised by Zayo’s move, saying that the rebirth of the Electric Lightwave brand was a sign that it was shining itself up for a potential sale.

“It looks like ELI being acquired was a pretty sure thing following the structural split Integra underwent back in August 2016,” said Brian Washburn, service director of global business network and IT services for Current Analysis, in an interview with FierceTelecom. “Zayo being the acquirer was also no stretch, given that company's charter.”

Fulfilling West Coast desires

By acquiring Electric Lightwave, Zayo will immediately gain a larger foothold in the desirable West Coast fiber market. This allows Zayo to further reach into the business community with not only more on-net fiber buildings, but also wholesale opportunities with content providers and social media companies.

On the West Coast alone, Electric Lightwave had 4,000 route miles of metro fiber in 35 markets including: San Francisco, Portland, Seattle, Sacramento, Salt Lake City, Spokane, Boise and Phoenix.

The acquisition also provides diversity along strategic long-haul routes, including access to indefeasible rights of use (IRUs) from Zayo itself, CenturyLink, Level 3 and Sprint. However, Electric Lightwave has a high fiber count of owned routes from Las Vegas to Phoenix and San Diego to San Luis Obispo.

Following Integra's acquisition of opticAccess in August 2015, Electric Lightwave doubled its long-haul optical routes and network capabilities. The opticAccess acquisition enhanced Electric Lightwave's Western fiber reach with a 3,500 route mile network which reaches from Seattle to San Diego.

What was interesting about that build is that it has direct access to a key Oregon data center cluster and cable landing station. Having access to a submarine cable landing station means Zayo becomes an attractive option for Asian providers that need access to the U.S. market or U.S. players to Asia.

“The greater scale Zayo achieves in important markets (Portland/Sacramento) and greater density in other areas (Seattle/San Francisco) should help it achieve further revenue opportunities,” said Jennifer Fritzsche, senior analyst at Wells Fargo, in a research note.

SMB segment future
A lingering question that remains about this acquisition is what will Zayo do with the legacy Integra SMB business line?

Integra had SMB operations mainly in Minnesota and Colorado. However, overall revenues have continued to decline as competition from cable operators like Charter and Comcast have continued to ramp.

SMBs have never really been a focus for Zayo, but the service provider indicated it will continue to operate the Integra SMB business and complete de-integration from Communications Infrastructure business.

Zayo said that the legacy Integra business aligns well with Zayo’s Canadian SME and voice businesses it acquired from Allstream last year. During the next four quarters, the service provider plans to move SMB customers and revenue from the Integra base to its core.

Another option is that Zayo could choose to sell the assets to another provider to spin them out.

SMB declines have continued to be an issue at a number of competitive servie providers. Windstream, which is in the process of purchasing EarthLink, is seeing similar revenue pressures in its SMB business.

Regardless of the challenges ahead, it’s clear that when the smoke clears Zayo has established itself as the lone independent fiber provider. With five large fiber network-related acquisitions taking place over the past month, this isn’t the last deal Zayo will seek with other regional fiber providers to further bolster its fiber war chest. –Sean@FierceTelecom