Adds 900 Fiber Route Miles in $18m Purchase of Arialink

Before the ink was dry on Zayo’s giant-sized $2.2b purchase of AboveNet, announced on March 19, the fiber provider found enough change in its pockets to make another acquisition. Just two days after the largest deal in the company’s history, Zayo announced on March 21 that it had executed a definitive agreement to acquire Lansing, Michigan-based Arialink for $18m.  The deal is expected to close in the second quarter of 2012.

While on a much smaller scale than its AboveNet acquisition, Zayo picks up Mid-Michigan’s largest fiber optic service provider with its Arialink deal. The company’s network includes 400 metro fiber route miles in and around Lansing and Ann Arbor, just a portion of its 900 fiber route miles.  Its fiber footprint also features 437 on-net buildings, a figure that will increase thanks to an ongoing fiber expansion project.

In February, Arialink broke ground on a $2.46m fiber build of a middle mile network that will connect medical hub Memorial Healthcare with a dozen rural healthcare facilities. The company will lay approximately 100 miles of fiber in order to interconnect this healthcare network.

In addition to its business services—high-speed dedicated Internet, virtual Ethernet services, VoIP and hosted PBX—Arialink also offers residential phone, television and Internet services. The assets and customers related to its residential business however are not included in the Zayo deal, and will be spun out to Arialink’s existing owners.

Turning to deal multiples, Zayo paid $20k per route mile in the transaction, just a fraction of the $100k per route mile it put up for AboveNet.  The discrepancy in multiples can be attributed at least in part to the size of AboveNet’s network and its presence in 17 Tier 1 U.S. cities and four European markets.

We do not have Arialink’s financials to calculate definitive revenue multiples on the deal, but deal hungry Zayo’s past transactions allow us to make some estimates.  In its past three priced fiber deals—its acquisitions of AboveNet, 360networks, and AGL Networks—Zayo paid in a range of 4.3x to 4.8x revenue.  This range indicates annual revenue of approximately $3.75m - $4.2m for Arialink.

In looking at fiber prices over the past few years, it its apparent that both cash flow multiples and revenue multiples are pointing higher of late. In transactions we observed in 2010, fiber deals on average were struck at 1.3x revenue and 5.4x trailing OIBDA while deals announced in 2011 and 2012 indicate mean prices of 2.4x revenue and 7.2x OIBDA.

The bullish projections for bandwidth demand and usage is no doubt a contributing factor to this upward trend observed in fiber multiples. According do a recent IDC study fixed broadband traffic is expected to increase at a compound annual growth rate of 50 percent over the next three years with mobile broadband usage growing even faster.  To put some numbers to it, IDC forecasts demand for worldwide broadband traffic will hit 116,539 petabytes per month in 2015, up from just 9,665 per month in 2010.

With a pair of deals under its belt this week, Zayo is building up its network to keep up with this soaring demand.