Lumos could be a valuable puzzle piece for Zayo, tower companies, says BTIG

two utility workers setting up a fiber cabinet on a sidewalk

Lumos Networks’ fiber network may lack the size of its larger competitors like Zayo and Lightower, but the service provider’s assets could be an attractive tuck-in acquisition for a larger fiber player or a tower provider like Crown Castle.

BTIG wrote in a research note that while Lumos lacks the scale of larger competitors, if the service provider can divest residential business the fiber assets could provide immediate regional scale in Virginia.   

“Lumos does not have the same strategic value to major players given its limited footprint, but its fiber assets could be an attractive acquisition for Zayo, tower companies, or private equity, especially if the company is able to exit its residential business,” wrote BTIG. “Lumos has ~9,200 route miles of fiber, which we believe could be worth ~$88,500 per route mile in an asset sale.”

RELATED: Lumos grows Q2 FTTC, enterprise revenue 22% to $22M, continues with separation plan

The service provider recently separated its legacy rural telco business from its growing fiber business, enabling it to look at various strategic options this year.

Zayo’s regional fiber push

Zayo itself told investors in January that there are a number of regional fiber players that could be attractive opportunities it could acquire to bolster portions of its growing network. 

Ken desGarennes, CFO of Zayo, said that with CenturyLink purchasing Level 3 and other similar deals taking place, there aren’t as many large-scale fiber network acquisition targets left. “There are still regional fiber providers out there that could be interesting tuck-in acquisitions that we would be interested in pursuing.”

According to BTIG, Zayo is valued at over $115,000 per route mile of fiber and Crown Castle made two fiber purchases at $100,000 and $130,000 per fiber route miles for Sunesys and FPL FiberNet.

Lumos’ drives FTTC, enterprise growth

What also makes Lumos an attractive asset is that it has been expanding its fiber-to-the-cell tower (FTTC) and enterprise customer base.

The service provider reported in the fourth quarter that total combined FTTC and enterprise revenue was $22 million, up 22% year-over-year.

On a combined basis, FTTC and enterprise made up 71 percent of total data revenue versus 64% in 2015. Lumos said 95% of the revenue was tied to Ethernet and other advanced fiber technologies

At the end of the quarter, Lumos completed a 822-mile fiber network to serve 257 unique sites for a wireless operator, which is now fully operational. Because this network passes by local businesses, Lumos was able to increase enterprise sales momentum.

“A large FTTC contract drove Lumos’ investment into the Eastern Virginia markets, positioning it to take advantage of new growth opportunities as multi-national telecom operators and enterprises seek diversified routes to US data centers that aren’t congested,” wrote BTIG.

BTIG added that Lumos’ fiber is less than a “1/2 mile from an undersea cable landing site in Virginia Beach, VA where four cables are expected to on-shore starting in late 2017, including two from Telefonica.”

What makes Lumos an attractive option for submarine cable operators that want access into the broader United States is that its network is already connected to a number of large data centers in Ashburn, Virginia, a key internet hub that today carries about 70% of global data traffic.