Crown Castle’s $7.1 billion purchase of Lightower might not be the culmination of consolidation in the dark fiber/tower business. The second that the Crown Castle/Lightower deal was consummated, analysts were already thinking about who might be next.
The leading suspect is Zayo Group, which will still be roughly three times the size of the combination of Crown Castle and Lightower, but is widely seen as undervalued.
Wells Fargo Securities in particular had more enthusiasm about what yesterday’s deal meant for Zayo Group than it did for the two companies actually involved. The firm stated up front that it does not believe Zayo is likely to be involved in any merger and acquisition possibilities any time soon, but then was practically profligate with explanations why Zayo would be a great M&A candidate.
There has been a string of deals in the space in the last few years, including CenturyLink buying Level 3, Uniti buying two smaller rivals and Crown Castle itself buying four, including Lightower.
Wells Fargo started by noting that the EBITDA multiples in all of those deals were in the 13x to 20x range, and that Zayo is trading at a multiple of only 10.1.
Wells Fargo also believes Zayo should, and eventually will, consider becoming a real estate investment trust. REITs are a relatively new way of organizing a company, making a company whose assets are mostly real estate into an investment opportunity more akin to a mutual fund than a stock.
There is a set of qualifications to become a REIT (e.g., 75% of total assets have to be real estate, 75% of gross income must be from rents, etc.). Zayo would have to makes several moves, including spinning off some assets (e.g., the former Allstream operation), to qualify, Wells Fargo noted.
The advantages of becoming a REIT for Zayo, Wells Fargo said, would be that it would open it up to a new investor base and potentially lower its cost of capital to invest in new projects. Crown Castle, not coincidentally, is already a REIT.
Those are some of the financial basics. Wells Fargo believes there are several types of company that might be interested in Zayo for strategic reasons.
“A tower operator could gain a growing footprint in the small cell space if it acquired ZAYO’s 126K fiber route miles,” Wells Fargo analysts wrote in a research note. “Cable operators could find ZAYO’s large enterprise customer base an effective means to move up the stack in the enterprise market. Finally, wireless carriers could seek to accelerate 5G network builds by acquiring a valuable portfolio of metro fiber assets (given that fiber is a key ‘ingredient’ in 5G architecture).”