M&A high on Zayo’s list

Zayo Bandwidth, a carrier based in Louisville, Colo., has been busy buying up fiber properties lately, including the networks of PPL Telcom, Memphis Networx and most recently Indiana Fiber Works. It also has the pending acquisition of Onvoy Communications. While many people in the industry would have been hard-pressed just a few months ago pick Zayo out of a line-up, the company is quickly making a name for itself via M&A.

None of its acquisition targets are particularly big names either, and it might be surprising at this point that there are any fiber networks left to acquire. Level 3 Communications bought several companies over the last few years in an effort to consolidate a crowded wholesale market, but Matt Erickson, vice president of product management and strategy at Zayo, said his company is working a different end of the spectrum. He said that Zayo began its M&A strategy buy researching viable acquisition candidates on Google and anywhere else it could get the information. The firm came up with a list of 61 companies it now uses as its M&A guide.

“One of our own objectives was to find out just how many entities were out there, and the list is our answer to that question,” Erickson said. “Some of them are small companies, but have some recurring revenue, and others are companies with little or no recurring revenue, but they own fiber properties.”

Zayo is sticking to its own zone. Erickson said, for example, that the company would not have pursued a deal to buy struggling Neon Communications, which was acquired in June by RCN for about $320 million. Instead, the company is using $225 million in funding it raised recently to finance most of its deals (Erickson said Zayo may use some debt financing to complete the Onvoy acquisition.)

General similarities to Level 3’s acquisition binge might not be coincidental. Several members of Zayo’s management team, including Erickson, CEO Dan Caruso, co-founder John Scarano and general counsel Scott Beer, used to work for Level 3 as well as former one-time telco ICG Communications. Erickson declined to discuss Level 3 or draw comparisons, but said the Zayo team drew significant lessons from its ICG experience.

“We went out and bought ICG for $7.5 million before it went into Chapter 22 bankruptcy, and what we learned is that telecom is a business like any other. There are ways to run a business properly, and to reinvest in it after you begin to make money.” They massaged some health back into ICG and eventual bundled the carrier and other properties into a $225 million sale.

Erickson calls the ICG acquisition/turnaround/sale a deal “that wouldn’t happen today” because most of the industry is not as skittish as it became during the telecom bust about buying struggling properties. “Most companies now truly believe that telecom has turned a corner, but there’s still a little skittishness and scar tissue out there.”

He noted that the networks Zayo is acquiring now may present some opportunities for future infrastructure investment, since they use rely on different generations of network technology, some of it reaching back into the 1990s. “We’ll continue to run down our list, but now that we have four entities, much of our focus will go toward operating the business,” Erickson said.