Since last July, Rumor Hound has sourced significant chatter about Zayo Group Holdings, Inc. (NYSE: ZAYO) , a Boulder, Colorado-based telecommunications infrastructure company. After initial chatter from lower popularity, high-reliability sources, higher popularity sources are now confirming Zayo as a target of significant interest. Though initial chatter surrounded strategic buyers such as Verizon, recent chatter has centered around a competitive bidding process consisting of primarily financial buyers. The most recent speculation indicates the auction is close to a conclusion and a deal is close.
Buoyed by a strong fundraising environment, private equity funds have looked to infrastructure as an attractive, defensive asset class in which to invest. Zayo provides sponsors optionality to growth in data centers and cloud computing infrastructure, as well as cash flows from more traditional telecommunications services businesses. Trading at approximately 10.3x 2018 earnings before interest taxes, depreciation, and amortization (EBITDA), the company is just under the average U.S. leveraged buyout multiple of 10.9x for the 2018 calendar year (Bain & Co.). However, after slapping a 20% equity premium, sponsors would likely be paying 12.4x 2018 EBITDA, or $14.5 billion, for Zayo. While a bit of a stretch earlier in the year, the cyclical marketplace for buyout financing should be able to digest a Zayo debt multiple north of regulators’ preferred ceiling of 6x EBITDA. This is largely the result of the company’s prospects for improved cash flows and the return to exuberance in leveraged finance as investors continue the hunt for yield.
The most likely acquirer for Zayo seems to be a consortium of funds advised by Stockholm-based EQT AB, Stonepeak Infrastructure Partners, and Digital Colony Partners. The latter two funds specialize in infrastructure and telecommunications assets, respectively, so expect them to be able to use Zayo as a platform to further consolidate the industry. Indeed, much of the deal’s success for the consortium, given the high price tag, hinges on the sponsors’ ability to wring out synergies similar to those offered by a strategic buyer. Additionally, while central bank policy continues to be relatively loose, late-cycle leveraged buyouts are always susceptible to increased credit spreads and the ensuing refinancing risk. That said, these are experienced industry-focused sponsors investing in a defensive asset, so these risks should not be a significant deterrent to obtaining financing and closing the transaction.
About Zayo Group
Zayo Group Holdings, Inc. (NYSE: ZAYO) provides mission-critical bandwidth to the world’s most impactful companies, fueling the innovations that are transforming our society. Zayo’s 130,000-mile network in North America and Europe includes extensive metro connectivity to thousands of buildings and data centers. Zayo’s communications infrastructure solutions include dark fiber, private data networks, wavelengths, Ethernet, dedicated internet access and data center colocation services. Zayo owns and operates a Tier 1 IP backbone and 51 carrier-neutral data centers. Through its CloudLink service, Zayo provides low-latency private connectivity that attaches enterprises to their public cloud environments. Zayo serves wireless and wireline carriers, media, tech, content, finance, healthcare and other large enterprises. For more information, visit zayo.com.