ANALYSIS: Zayo embarks on Christmas shopping spree

Zayo Group made two major acquisitions in November – snapping up European telecoms provider Viatel and Canadian fibre-optic company Allstream – as it continues its fierce investment in fibre.

Its €95 million purchase of Viatel will significantly expand its presence in Europe, earning it Pan-European intercity and metro fibre capability via a 8,400km fibre network across eight countries. 

The move also gives Zayo 12 metro networks, seven data centres and connectivity to 81 on-net buildings, along with two wholly-owned submarine cable systems connecting two of Europe’s busiest routes between London and Amsterdam, and London and Paris.

The deal is expected to produce a post-synergy multiple of 10.5 times earnings before interest, taxes, depreciation and amortisation (EBITDA).

"Network assets really do it for us," Alastair Kane, managing director of the UK and Ireland, told Capacity. "This acquisition complements beautifully with our fibre assets around Europe, specifically with deeper fibre assets going through France and southern Europe. It is a beautiful fit in terms of network geography." 

Viatel’s pan-European fibre assets will provide Zayo with a platform for further expansion, such as investing further in metro markets or future acquisitions.

The deal is expected to help boost dark fibre revenue. As 4G networks continue to be rolled out, mobile operators will move from buying Ethernet-type services towards fibre infrastructure as it provides a more economical way to tap into further growth, Kane predicts. 

Zayo has emerged as a major provider for mobile backhaul services in the US and is looking to establish a similar leadership position in Europe. 

Another clear synergy is Viatel’s customer base of wholesale and large bandwidth providers in the enterprise space which mirrors Zayo’s global business. 

"Viatel has a very good customer base across wholesale and large bandwidth providers within the enterprise space. That mirrors our global business very much, which tends to be 50-50 between the two," said Kane, adding that the deal has provided Zayo with opportunities into market segments such as government, healthcare, logistics, transport and financial institutions. 

"Our expanding asset base and capability on a geographic level has given us the opportunity to leverage existing customers and launch into new customer industries off the back of this network," he said. Zayo intends to accelerate investment in metro markets, co-location as well as cloud services on the back of new assets to address customers’ demands for more bandwidth and routes.

Already the deal has received significant interest from customers. "There are customers in the US who see an opportunity to use Zayo globally as a result. That is the great advantage of this network. It isn’t a Europe-only capability; it is a capability that enables us to leverage relationships with our customers in the US and more importantly, to provide them with wider and deeper services," said Kane.

The dust had barely settled on the Viatel deal before news surfaced that Zayo is to purchase Allstream – a wholly-owned unit of Canada’s Manitoba Telecom Services (MTS) – for $348 million. (C$465 million). 

MTS, once owned by the province but privatised two decades ago, had sought to find a buyer for Allstream. In 2013, its planned $520 million sale of Allstream to Egyptian tycoon Naguib Sawiris’ Accelero Capital was rejected by the Canadian government due to national security concerns.

Zayo’s interest in Allstream lies in its substantial fibre and co-location assets. 

The acquisition gives Zayo immediate entry into the Canadian bandwidth market. Allstream owns 9,000 route kilometres of metro fibre network in Toronto, Montreal, Vancouver, Ottawa and Calgary and connects approximately 3,300 on-net buildings. 

Zayo will also acquire Allstream’s 20,000 route kilometre long-haul fibre network connecting major Canadian markets and 10 US network access points. 

Upon completion of the acquisition, Allstream will be reorganised into three parts. Its communications infrastructure – which represents half of its revenue – will become Zayo Canada while the remaining part will become two business departments; one focussed on voice and universal communications and the other on small businesses. 

About $300 million in revenue is expected from Zayo Canada, according to the company.

Acquisitions have been a key part of Zayo’s strategy for growth. The group has made 36 acquisitions – including the two in November – since 2007. 

In 2012, Zayo acquired high bandwidth provider AboveNet, a New York-based operator with over 2.3 million fibre miles connected to more than 2,600 buildings, for $2.2 billion, its largest deal to date. 

The deal, which provided Zayo with its first foray into Europe, effectively doubled its size with operations in 45 US states and seven countries in North America and Europe. Two years later, it acquired London-based dark fibre provider Geo Networks which, according to Kane, "completely changed the scope and scale of Zayo’s business". Its $675 million acquisition of the operating units of co-location and infrastructure-as-a-service provider Latisys in January 2015 would signal its ambitions in managed services, co-location and infrastructure-as-a-service.

Explaining Zayo’s M&A strategy, Kane said: "We look at opportunities as they come. We will pick up companies that have great people, good products and customer relationships but may not necessarily have the capital to grow."