Zayo's Allstream acquisition closes, but analysts fret over legacy business declines

Zayo Group has completed its acquisition of Allstream, a deal that will give it instant access into Canada, but some financial analysts are concerned that that Allstream's legacy service declines will remain a near-term drag.

A Barclays research note said that while Allstream has paved a foundation for future growth in broadband and IP/unified communications, the service provider's overall revenues are being hurt by drops in long-distance voice and ATM and Frame Relay data services.

Similar to other large service providers, Allstream has seen broadband and IP/UC grow over 10 percent year-over-year.

However, during the same four-year period, Allstream's local access services, long distance and legacy services, and other service revenues have declined at rate of 12, 14 and 26 percent, respectively.

"We recognize that Allstream has benefitted from recent momentum out of select areas of its business (i.e. broadband and converged IP / unified communications)," Barclays said in a research note. "However its top line remains exposed to structural demand declines from legacy service offerings (i.e. local access services, long distance and legacy services, and other service revenue) – one of the key factors that influenced Zayo's ~4.0x LQA EBITDA purchase multiple."

Barclays added that in the near-term its "revised estimates assume revenue declines in the low-single-digit range for Zayo's newly acquired Canadian assets."

Despite seeing declines in Allstream's legacy business lines, Barclays maintains that Zayo will likely see its net install count continue to rise.

Over the course of the next year, the firm forecast that Zayo will be able to reach $3 million in net installs.

"With regards to Zayo's organic business, we believe the demand backdrop not only remains healthy but is improving," Barclays said. "Given its pipeline of activity, we believe the company remains on track with reaching a $3.0 million net install number over the next 12 months. Given typical quarterly demand trends, we would not expect a net install number of $3.0 million during the March quarter, however. Rather our estimates factor in gradually improving net install trends to build over the new few quarters."

Evidence that Zayo can reach its net install goals were clearly evident in its fiscal second quarter period where gross installs reached $6.4 million and net installs came to a near-record $2.2 million.

Some of the key contributors to its net install growth are coming from selling lit and dark fiber services to content providers and wireless operators.

Interestingly, as Zayo builds out fiber to satisfy wireless operator backhaul needs it is simultaneously attracting other customers to purchase service on these fiber routes.

Take the Dallas area, where a newly-minted fiber buildout focused on providing fiber-based wireless backhaul for a major wireless operator is attracting interest in other lit fiber and colocation services.

After winning a 2,000 route mile fiber-to-the-tower deployment in May 2015 for a major wireless operator, a global SaaS provider signed a contract to access colocation in Zayo's Dallas Empire Central facility plus four diverse 10G wavelengths tethering to a Zayo presence in the primary Dallas carrier hotel.

Related articles:
Zayo net installs rise to $6.4M as provider narrows net losses to $10.8M
Zayo, Crown Castle, other dark fiber providers could get revenue boost from C-RAN fronthaul, says Well Fargo
Zayo upgrades Forth Worth, Texas municipal network with dark fiber
Zayo's Atlanta data center expansion driven by content provider customer win
Zayo eyes strong ROI as it inks new Tier 1 FTTT deal in Indiana

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