“Go Shop” Period Gives Potential Bidders 30 Days to Top Offer

The deals keep getting bigger for the Louisville, Colorado-based Zayo Group. The private equity backed fiber provider announced on March 19 that it agreed to acquire fiber network operator AboveNet for $2.2b in cash, or approximately $84 per share. Should the transaction go through, it would be the largest acquisition in the company’s five year history, eclipsing its October 2011 purchase of 360networks for $345m by a wide margin.

The AboveNet purchase however is not yet a done deal. Under the terms of the agreement, the White Plains, New York-based company has entered a “go shop” period under which it can entertain offers from other perspective buyers. The period ends April 17, but could potentially be extended to May 2. If AboveNet cannot find an offer that bests Zayo’s $84 a share bid, the companies are expected to close the transaction mid-2012.

Should Zayo’s bid hold up, the company stands to substantially increase its fiber network footprint in North America and Europe. Zayo would add AboveNet’s high speed, private fiber optic network that spans 2.2m fiber miles over 9k metro route miles.  AboveNet also owns and operates a long haul fiber network of over 13k route miles that interconnects the company’s 17 Tier 1 U.S. metro markets and 4 European markets. Much of AboveNet’s metro network is equipped to support transport at 40 Gbps, and it is currently upgrading its long haul fiber network to support these speeds. Post transaction, the combined companies’ network assets would include 67k fiber route miles, covering 8,300 on net buildings.

In order to finance the purchase, Zayo will receive capital injections from private equity firms GTRC LLC and Charlesbank Capital Partners. Both firms have an existing ownership stake in Zayo, but are doubling down on fiber, projecting a sharp increase in bandwidth usage in the near future.   

GTRC LLC principal Phillip Canfield spoke to this point: “We’ve been looking for ways to make a bet on increased bandwidth consumption. These companies provide the underlying infrastructure necessary for that to happen.”

At $84 a share, Zayo and its private equity backers paid a modest 13 percent premium, or $251m, for AboveNet, as shares of the company closed at $74.25 pre-deal last Friday. From a multiple perspective, Zayo paid 4.8x trailing revenue and 11.7x trailing cash flow for AboveNet, just slightly above levels at which the public had been trading AboveNet shares (4.2x revenue and 10.4x OIBDA). Consistent with GTRC’s bullish outlook on fiber, the deal’s multiples are at the highest levels we have observed in network transactions since 2009, well above recent averages of 2.1x revenue and 6.6x trailing OIBDA.

While Zayo has not discussed specific synergy targets associated with the purchase, combining networks and operations will likely provide benefits for Zayo that drive the deal’s forward looking multiples lower. In priced fiber network deals we have observed since 2009, pro forma OIBDA multiples on average have been 22 percent lower than trailing OIBDA multiples, while the median improvement has been 21 percent. These improvement estimates point to a pro forma OIBDA multiple in the range of 9x-9.5x for the AboveNet deal, indicating annual synergies of approximately $50m for Zayo through the deal. For the next thirty days however, AboveNet will test the waters, seeking alternative suitors and looking to push these deal multiples even higher.