Zayo’s reorganization offers greater outlook into performance, valuation, says analyst

Money

As part of its integration of Electric Lightwave (ELI), Zayo recently reorganized its business into five main segments, a move analysts say will provide greater visibility into their operations.

Under this new structure, Zayo’s business segments will include: fiber solutions, colocation, transport, enterprise networks, and Allstream voice and small to medium-sized business (SMB). All of these segments will share a common sales and customer service team.  

Analysts say Zayo’s plans could provide various benefits for how the company is perceived by investors.

“We believe this structure offers additional transparency into underlying performance and valuation,” said Jennifer Fritzsche, managing director at Wells Fargo, in a research note. 

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Unsurprisingly, fiber solutions is the biggest element of the group. The service provider expects the unit, which consists mainly of dark fiber, will make up 47% of the company's total EBITDA by December 2017.

The fiber solutions segment will consist of six geographic business units. Each of these units will be treated as a portfolio company run by a seasoned executive.

Fritzsche said that fiber solutions will “likely be the biggest value driver.”

Although fiber solutions shares similar characteristics with tower companies—like recurring revenues backed by long-term contracts—Fritzsche said that Zayo “has a broader and more diversified customer base than that of the towers which spans industries including enterprise, content, wireless, wireline and others.”

Enterprise and colocation will make up 17% and 10% of Zayo’s EBITDA.

Zayo said that it expects to see low to mid-single digit organic revenue growth and 35-40% EBITDA margin for the enterprise segment. In the colocation segment, Zayo’s focus will be on purchasing other data center providers such as Clearview International. Clearview gave the service provider an additional 30,000 square feet of colocation space, for example.

Finally, Zayo has forecast lower revenue opportunities for its Allstream SMB and transport business segments.

Similar to other large network providers, Zayo’s transport business is going through its own growing pains. While it is seeing growth in optical wavelengths and IP services, SONET continues to decline.

Zayo noted that the transport segment will produce “low single digit organic revenue growth as SONET decline offsets higher growth rates.”

“Given their slower growth trajectories due to legacy products such as voice and SONET, we have applied 5x and 7x EBITDA multiples to ZAYO’s Allstream and Transport segments, respectively,” Fritzsche said.

Due to an ongoing decline in SMB revenues, Zayo’s Allstream unit will see negative organic revenue growth. The service provider said that by keeping Allstream apart from the rest of the units, Zayo can manage it for cash or sell it off at a later date.

“By separating Allstream from its core businesses, Zayo will have more optionality to either harvest it for cash flow or eventually spin it out,” Fritzsche said.