Lumos Networks (Nasdaq: LMOS), a regional service provider that has been gaining traction in the business and wholesale market selling fiber-based Ethernet services, could be an attractive acquisition target, says Cowan and Company in a report.
"We believe Lumos is a likely M&A target; however, we view it as unlikely in 2013," Cowan and Company wrote in a recent ignition report. "This is mainly because the new management team has developed a detailed multi-year growth plan and we believe it is focused on accelerating revenue growth before actively looking to sell the company at arguably a much higher multiple than it would receive today."
A key point of Cowan's argument hinges on the ongoing growth of Lumos' fiber-based data revenue.
In Q4 2012, Lumos reported $52.7 million in revenue, up from $51.1 million in Q4 2011 due to gains in its strategic data service segment revenues for business customers and an uptick in fiber to the tower (FTTT) installations. Within its strategic data segment, business and wholesale revenues rose to $9.2 million and $13 million, respectively, while IP services climbed to $4.75 million.
In addition to strategic data, FTTT has become another revenue growth engine for Lumos. Although many larger telcos such as Windstream (Nasdaq: WIN) are coming near the end of their FTTT investment cycles, Lumos has only connected 370 of the 5,000 towers that are in its network footprint.
Cowan wrote in its report that they forecast the service provider's "strategic data revenue to represent 59.6% of total revenue and total revenue to grow 1.4%."
One of the vehicles that Lumos is using to achieve its IP-based data services growth is the expansion of its metro fiber network. The service provider immediately expanded its overall fiber network footprint through its acquisition of Allegheny Energy's fiber assets and FiberNet in 2009 and 2010, respectively.
Today, Lumos operates a 5,800-route mile long haul fiber network and a large metro network in over 100 markets throughout six states, including Virginia, West Virginia, and portions of Pennsylvania, Maryland, Ohio, and Kentucky. The majority of its capital investments on metro fiber have concentrated either inside or near Virginia where it has become a growing Tier 2 challenger to incumbent providers such as telcos and cable operators such as Verizon (NYSE: VZ) and Cox.
As it built out its long-haul and metro fiber assets, it has expanded its on-net building footprint to 1,196, up from 1,150 buildings in Q3 2012.
This year, the service provider plans to extend its network into other adjacent Tier 2 and Tier 3 markets, including two new markets in both Virginia and Western Pennsylvania.
Tim Biltz, Lumos' CEO, outlined part of this "edging out" strategy during the 40th Annual Global Media and Communications Conference in December.
At that time, Biltz said that the telco has 10 percent of TDM "mindshare" in its current markets, but sees opportunities to edge out to new customers that are within 10 miles of its fiber footprint to provide Ethernet and IP-based services.
Cowan said that this edging out strategy "allows the company to cost effectively expand its addressable market and still leverage its current infrastructure."
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