Monday
Oct312011

Zayo Group Agrees to Pay $345m for 360networks

Collective Fiber Network to Reach 42k Route Miles

On October 7th, Zayo Group announced its agreement to purchase Seattle-based 360networks in a deal set to close in early 2012. The Louisville, Colorado-based Zayo Group has actively pursue deals since its inception in 2007, 360networks represents its seventeenth acquisition in four years.

360networks operates an intercity and metro fiber network of 18.5k route miles across 22 states, providing fiber-based bandwidth, carrier-neutral colocation and other fiber-based solutions to its medium and large enterprise clients. Its network connects more than 70 markets across the United States, including new markets for the Zayo group: Albuquerque, Bismarck, Des Moines, San Diego, San Francisco and Tucson.  Following the deal’s close, Zayo’s collective fiber network will extend 42k route miles and nearly 2m fiber miles.    

There is much familiarity between the two companies, as earlier in the year they entered into an agreement under which the Zayo Group provided metro dark-fiber connectivity to 360networks.  The deal expanded 360networks’ service area into new markets and thousands of on-net buildings, and also increased its delivery speeds for private line, Ethernet and IP transit services.

In addition to its bandwidth infrastructure services, 360networks is a wholesale service provider of VoIP services that include IP origination and IP termination. It is a registered CLEC in 36 states covering 1,606 rate centers that serve 80m people and recently expanded its VoIP presence in Houston, adding 48 rate centers and around 4.5m people to its coverage area.

The Zayo Group has indicated that it will spin-off 360networks’ VoIP operations into its wholly owned subsidiary, Minneapolis-based Onvoy Voice Services, which offers a portfolio of wholesale services to wireline and wireless providers.  Onvoy has been in business since 1992, and was one of Zayo Group’s first acquisitions back in November 2007. Zayo eventually spun-off Onvoy into a separate entity back in March 2010.

While financial terms of the deal were not initially released, Zayo recently reported in an SEC filing that it will pay $345m for 360networks, or approximately $18,649 per fiber route mile.  The purchase is Zayo's largest acquisition to date, five times larger than its 2010 purchase of AGL Networks for $71.5m.

Given that there is no public information on 360networks’ revenue, we don’t know for certain what type of revenue multiple was paid.  In priced fiber network deals over the past year however, we’ve observed average revenue multiples of around 1.2x. If Zayo paid a similar multiple, 360networks will more than double Zayo's top line with the deal. As of June 30, 2011, Zayo’s annual revenue was $287.2m. An estimated multiple of 1.2x revenue paid for 360networks would imply revenues of approximately $288m.

Monday
Oct312011

Towerstream Makes Largest Buy to Date

Fixed Wireless Provider Expands in Los Angeles

Middletown, R.I.-based wireless broadband provider Towerstream Corp. (Nasdaq:TWER) announced October 31, 2011 that it has entered into a definitive agreement to acquire certain business assets from Los Angeles-based Color Broadband, in a transaction comprised of cash, common stock and assumed debt. Towerstream will acquire all customer contracts, network infrastructure and related assets of the fixed wireless service provider, and is expected to close the deal by the end of the year.

It’s Towerstream’s fourth buy over the past two years, and also the largest to date. The value of the deal was not disclosed, but the biggest deal prior to this announcement was for nearly $3.5m. Towerstream said that the Color Broadband business will increase its L.A. market revenue by 70%, implying annual revenue for the target of around $2.8m. That's based on the $1m Towerstream did in L.A. in 2Q11, as reported in the company's 10-Q. It’s still tough to guesstimate the deal value, however. While Towerstream trades for more than 5x revenue presently (see below), it paid just 1.2x revenue when it acquired the fixed wireless operations of Chicago-based Sparkplug in April of 2010.

Arguably, Towerstream is still in ramp-up mode, which justifies the relatively high trading multiple. The company has posted little in the way of positive cash flow over the past year, but is still actively seeking and building acquisition markets. At the end of 2Q11, Towerstream was serving an estimated 3,200 business customers with its fixed wireless solution, in a dozen markets.

Based on Towerstream's closing price on October 28, 2011, and backing out the company's substantial working capital surplus (some of which may now be committed to the Color Broadband deal), the market is valuing the company at about $146m, or 5.4x run-rate revenue. Based on the healthy margins reported in its more mature markets there may be a good deal of upside to the company's cash flow--IF it can maintain market share.

But it seems that everyone and his brother is going after the broadband and business markets these days; in order to hit those promising cash flow targets, Towerstream's wireless solution (which relies on both licensed and unlicensed spectrum as well as WiFi) will have to increasingly compete with fiber-based competitors. My guess is that the company is able to compete effectively on price--a wireless solution is generally cheaper than fiber--but the question will become one of capacity and speeds over the longer term.

Tuesday
Oct252011

Satview Broadband Targets Cable Systems in Nevada

WENR Subsidiary Signs Letter of Intent to Acquire NV Cable Assets

On October 12, Nevada-based WENR Corporation (OTC:WNRC.PK) announced that its wholly-owned subsidiary, Satview Broadband signed a letter of intent to acquire its seventh cable system in Nevada. Earlier in 2011, Satview expanded its Nevada cable footprint in a deal with Baja Broadband, and it continues to target more properties in the rural towns located near its current service areas.

Reno-based Satview Broadband was started in 1999 by president Tariq Ahmad as an MSO, initially operating three cable systems in Nevada. After ten years of operations, Satview was purchased by WENR, a media holding company, in a deal that closed July 1, 2010. Ahmad received 5m shares of WENR in the deal, valued at approximately $300k, and continues to manage the day to day operations of the company. Shortly after the WENR deal, Satview turned into a buyer, acquiring three cable systems in northern Nevada from Baja Communications for $800k.

Dan Green, ceo of WENR Corporation, commented on WENR’s cable system acquisition strategy following the system purchase from Baja Broadband. "We are in the process of integrating two cable providers (Satview and Baja). We know exactly what we are looking for in opportunities and believe we have found several acquisition targets," noted Dan Green, CEO of WENR Corp.

The opportunities that WENR and Satview seek: to expand service area around Satview’s existing footprint in Nevada, and to increase ARPU through the bundling of services and system upgrades. The company is currently investing to upgrade Internet and voice services in its service areas in Elko, Carlin and Battle Mountain that were acquired from Baja Broadband. Its goal is to increase market saturation to 50% of the 16k homes in the region, up from the approximate 25% penetration level at the time the systems were acquired.

Following the Baja Broadband asset purchase, Satview now operates cable systems in six Nevada markets: Elko, Battle Mountain, Carlin, Jackpot, Wells and Topaz Lake. It generates approximately $3m annually in revenue and will more than double that figure following the close of its most recent purchase. In WENR’s press release announcing Satview’s system acquisition, the company indicated that the target property generates over $3m per year. 

According to a June 2011 presentation to investors, WENR indicated that Satview was looking at three specific systems in close proximity to its current operations as acquisition targets. It indicated that system #1 serves 900 subs and generates $700k annually, and system #2 serves 1,200 customers and generates $1m annually.  The third property WENR mentions, presumably the subject of its recent letter of intent, serves 3,300 customers and generates around $3.2m per year, or approximately $1k per customer.

Using the numbers from of Satview’s Baja purchase as a benchmark, we can derive an estimate for the price tag of its recent target. In that deal, Satview acquired 4,000 customers and paid only around $200 per sub, shelling out $800k for the three systems. Based on a price of $200 per sub and 3,300 subs, we can imply a purchase price of around $660k for its recent cable purchase, translating into a revenue multiple of well under 1x. The low deal multiples in both cases make sense given that the systems are located in sparsely populated, rural areas. 

While the targeted cable property and its current owner remain unnamed, a handful of cable systems in Nevada are logical targets for Satview. Charter, which divested cable assets in Nevada in 2006 and looked to sell its Los Angeles systems earlier in 2011, operates multiple systems near Satview’s Topaz Lake operations. 

Based on WENR’s presentation to investors in June, Satview doesn’t figure to be away from the deal table for long following the close of this acquisition. When forecasting forward looking revenues for Satview, WENR management estimated $9m per year, factoring in revenues for all three targeted systems mentioned above.  One down, two to go.

Friday
Oct142011

Data Center M&A Heats Up as Global Demand Rises

Spending on Data Centers to Reach $99b in 2011

The data center market has heated up over the past two weeks, with the announcement of a pair of acquisitions.  The deals come at a time when the demand for data storage continues to rise.  According to a report released Thursday by technology research firm, Gartner, spending on data center servers, storage and networking equipment will rise 13% to $99b in 2011, above pre-recession levels.

In a deal announced on October 6th, global data center provider Digital Realty Trust (NYSE:DLR) acquired a data center located in Sacramento Country from Seattle-based Telecom Real Estate Services for $30m. The property is located at 11085 Sun Center Drive in Rancho Cordova, and measures 69,000 square feet.  The center has a history of use by some large players in telecom—first MCI, then Verizon (NYSE:VZ).  Both providers used the data center as a telecom switch.

With the acquisition, Digital Realty expands its California footprint, more than doubling its presence in the Sacramento market.  The company owns and operates a 63,000 square foot property on Gold Camp Drive, also located in the city of Rancho Cordova.  The purchase however is just a drop in the bucket compared to Digital Realty Trust’s overall portfolio. The data center giant owns 98 properties throughout Europe, North America, Singapore and Australia.  Its real estate holdings combine to measure 17.3m square feet.

Based on the purchase price of $30m, Digital Realty paid approximately $435 per square foot in the deal.  The property was particularly attractive based on the fact it is fully leased on a long term basis to SunGard Availability Systems Inc.  By contrast, Digital Realty is still looking for co-location tenants in its Gold Camp Drive data center. As part of its acquisition strategy, Digital Realty seeks properties that have predictable, long-term cash flows (rents), making data centers with existing tenants locked in logical targets. 

Scott Peterson, chief acquisitions officer at Digital Realty, commented on its recent purchase. “This acquisition adds a newly renovated, high quality, and fully leased operating asset to our portfolio at an attractive going in cap rate. The property is located near our 3065 Gold Camp data center facility, expanding our presence in the Sacramento market and contributing to our revenue stream with a long term, stabilized lease.”

In addition to being fully leased, the data center’s Sacramento location is increasingly attractive for companies to store their data thanks to cheaper electricity and relatively inexpensive real estate.  Twitter, among other companies, has recently leased space in the Sacramento area.

On the heels of Digital Realty’s purchase, Denver-based Hosting.com announced that it had acquired Dallas-based managed services provider and data center operator, Neo Spire.  Hosting.com offers cloud hosting and recovery services and is owned by private equity firm, Charlotte-based Pamlico Capital.  While financial terms of the Neo Spire deal were not disclosed by the company, Golub Capital recently provided a $78m loan to Hosting.com in connection with the acquisition.

Neo Spire owns and operates data centers in both Dallas and Atlanta, located in close proximity to major fiber networks.  The connection at its Atlanta-based facility, a 50,000 square foot property, sits upon on a main fiber backbone in the city.  With its acquisition, Hosting.com’s total data center space now totals 131k square feet with a footprint in Dallas, Denver, Irvine, Louisville, Newark (DE) and San Francisco.  

While the Digital Realty purchase was more of a straight forward data center deal, there is a large managed services piece to Hosting.com’s acquisition.  Neo Spire offers a full range of hosting solutions: fully managed hosting, dedicated server hosting, private cloud hosting and colocation services. In addition, Neo Spire offers a compliance based approach to network and data security framed around the PCI Security Standards that helps companies navigate complex industry and government regulations.

Hosting.com has suggested that it will look to cross-sell its new Neo Spire clients with its own portfolio of cloud services, specifically its cloud replication solution that provides offsite data protection and disaster recovery. In late August, Hosting.com launched its new data loss prevention service that utilizes VMware to enable automated replication of a customer’s virtualized data from a Hosting.com data center, to a recovery site.

Looking back at the M&A in data centers this year to date, 121 properties measuring near 4.4m square feet have been dealt in selected transactions. While price tags were not disclosed on a number of the acquisitions, the priced deals have totaled near $5.5b. Based on these numbers, Gartner’s bullish outlook for the data center market is reinforced.  

Tuesday
Oct112011

Gardonville Cooperative Telephone Assoc. Acquires Wisper Wireless

Expanding Broadband Wireless Service in Douglas County, Minnesota

Just more than a year ago, acquisitive Arvig Communication Services announced that it was acquiring nearby DiversiCOM, an ILEC/CLEC serving Melrose, Minnesota. Also included in the deal was wireless broadband service provider Wisper Wireless, which delivers Internet access service over leased EBS spectrum in Douglas County, Minnesota.

Yesterday the companies announced that Gardonville Cooperative Telephone Association, based in Brandon, Minnesota, has acquired Wisper Wireless. Financial details were not disclosed, nor were subscriber counts.

Gardonville currently provides wireless broadband service over two leased 700 MHz licenses, also in Douglas County. The company intends to integrate the two systems and according to FCC filings, now has control of up to 55.5 MHz of spectrum in parts of the county.

 

Wisper Wireless offers six different monthly service plans, based on the speed provided. At the low end, customers can get 256k service for $29.95 per month; at the high end Wisper offers 1.5 Mbps for $54.95 per month. All plans include five email addresses, spam and virus filtering, 24/7 technical support and 50 MBs of disk storage.

In the transfer application for the leases, Gardonville and ACS pointed out that “When the Commission adopted new rules for this [EBS] spectrum, it did so to help meet its ‘goal of providing all Americans with access to ubiquitous wireless broadband connections, regardless of their location.’ By significantly revising its rules, the Commission has encouraged the ‘provision of new technologies and services to the public.’ In addition, the Commission expects that services in the 2.5 GHz band will ‘offer a significant opportunity to provide competition to cable and digital subscriber line (DSL) services in the provision of broadband services in all areas.’ Grant of this application will meet all of these Commission goals by permitting Wisper and Gardonville to hold the spectrum necessary to provide a competitive broadband service within the Douglas County, Minnesota area."

It’s interesting to see the EBS (Educational Broadband Service) spectrum being used for broadband service when most ILECs are jumping on the Verizon LRA bandwagon or waiting for 700 MHz LTE equipment and handsets to become available for licenses acquired at auction. At 2.5 GHz, however, the propagation characteristics are less attractive than 700 MHz, but for a one-county market area, it  just might do the trick. With a high end speed of just 1.5 Mbps, however, it seems to me that technological advances will be needed before the service can be truly competitive with cable broadband.

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