Zayo acquires Electric Lightwave for $1.42B, deepens western market fiber holdings

Zayo has jumped on the M&A bandwagon again, announcing a deal to acquire Electric Lightwave—previously known as Integra Telecom—for $1.42 billion.

Electric Lightwave, which was originally purchased by Integra in February 2006 for $243 million, was initially used as a fiber backbone to provide backhaul for the service provider's SMB business traffic. The Electric Lightwave brand re-emerged last August when Integra spun off its fiber network and assets into a new company.

Integra maintained its legacy network access networks in the northwest part of the United States as well as in Minnesota, North Dakota and Colorado. 

Similar to other acquisitions that Zayo has made in recent years, the acquisition of Electric Lightwave is about bolstering its growing portfolio of fiber network assets.

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ELI customers will also be able to get access to Zayo’s Tranzact platform and implementation will provide seamless online access to viewing, purchasing and managing the combined customers and network.

Zayo said about 40% of Electric Lightwave’s existing revenue aligns with Zayo’s infrastructure business segments, and will be easily integrated into the core Zayo organization, processes and systems.

Enhancing western reach

By acquiring Electric Lightwave, Zayo will gain a greater foothold in the Western part of the U.S.—a key growth target for service providers trying to enhance their presence with businesses—and a growing base of content and social media companies that need alternative fiber connectivity routes.

Electric Lightwave 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. 

“Electric Lightwave has both strong metro fiber assets in key West Coast markets and capacity and routes that will augment Zayo’s intercity footprint,” said Dan Caruso, chairman and CEO of Zayo, in a release announcing the acquisition.

Mike Sapien, principal analyst of enterprise services for OVUM, told FierceTelecom that Zayo will be able to immediately deepen its presence in the Western U.S. where it did not have a major presence.

“ELI fiber is good fill in for Zayo,” Sapien said. “It has limited west coast coverage but some valuable routes.”

Zayo will also gain access to Electric Lightwave’s growing base of large enterprise and wholesale wireless provider customers that it serves with a mix of lit and dark fiber services.

The Western U.S. fiber market has continued to become a competitive point for service providers.

Zayo will now be facing off with not only a more powerful CenturyLink, which is acquiring Level 3, but also Windstream.

Windstream announced in October that plans to expand its long-haul express fiber network into the Western region to meet growing wholesale and enterprise customer bandwidth demands.

Upon completion of the network expansion next year, Windstream will have 100G long-haul networks in various key Western cities such as Salt Lake City, Reno, Nevada, Las Vegas and the Silicon Valley/San Francisco Bay Area.

SMB in flux

One of the lingering questions for Zayo is how will they handle the SMB part of the business. The remainder part of the business, which is a viable cash-flow generating business, has a small to medium-size business customer base that aligns well with Zayo’s Canadian SME and voice businesses.

Sapien said that Zayo will need to figure out how it can leverage and potentially grow the SMB business, which was once the key focus of Electric Lightwave before it turned more of its emphasis on serving large enterprises and wholesale customers.

“Integra now needs to find home for the less valuable, low margin SMB business,” Sapien said. “I suspect some but not major overlap with existing Zayo fiber.”

Zayo said that it expects over $40 million in annual cost synergies from the integration of Electric Lightwave in its operations, and Zayo will also benefit for more than $400 million in tax breaks from carry-forward of losses at Electric Lightwave. 

After clearing necessary federal and state regulatory approvals, Zayo expects to close the deal in the first quarter of 2017. The transaction will be funded with a combination of cash on hand and debt.