Marc Ganzi’s vision of diversification took another big step yesterday as his global investment firm Digital Colony purchased fiber optic network provider Zayo Group, with the help of EQT Infrastructure IV fund, in a transaction valued at $14.3 billion. Zayo will transition from a public company to a private company but remain headquartered in Boulder, Colorado. The deal is subject to regulatory and shareholder approval.
Jennifer Fritzsche, senior analyst, Wells Fargo Securities, said. “Ultimately, we believe ZAYO will be a valuable asset within the acquirers’ portfolios and create natural synergies with their other investments. Digital Colony, through its partner Digital Bridge, touches many of the converging parts of the communications infrastructure ecosystem.”
Digital Colony is a combination of Digital Bridge Holdings, which is headed by Ganzi, and Colony Capital, a real estate investment management firm. Digital Bridge is a holding company that is quite diversified, owning Vertical Bridge, Mexico Tower Partners, ExteNet Systems, Databank, Vantage Data Centers and Andean Tower Partners.
As a global investment firm, Digital Colony focuses on next generation mobile and internet infrastructure – towers, data centers, small cells, and fiber.
Ganzi said, “Zayo has a world-class digital infrastructure portfolio, including a highly-dense fiber network in some of the world’s most important metro markets. We believe the company has a unique opportunity to meet the growing demand for data associated with the connectivity and backhaul requirements of a range of customers.”
Goldman Sachs and J.P. Morgan are serving as financial advisors to Zayo Group in connection with the transaction and Skadden Arps is serving as legal counsel. Morgan Stanley and Deutsche Bank are acting as financial advisors to Digital Colony and EQT Infrastructure, and Simpson Thacher is serving as legal advisor.
Spencer Kern, analyst, New Street Research, said the transaction was bad news for Crown Castle International. First, the pricing of transaction has negative implications because the implied multiple on Zayo’s fiber is 7x lower than the multiple placed on CCI’s fiber by the market.
“We don’t see any reasons why CCI’s fiber should trade at such a high premium to Zayo’s; at the multiple implied by the Zayo transaction, we see 8 percent downside to CCI’s stock price,” Kern wrote. “Second, the new ownership of Zayo could drive greater competition in small cells, putting pressure on CCI’s small cells win-rate, pricing, or both.”
A Busy Year for Digital Colony
Since its inception, Digital Colony has aggressively moved forward on Ganzi’s vision of diversification, with a particular emphasis on the United Kingdom. Last August, Digital Colony entered the U.K. indoor DAS and small cell market with an investment in Stratto, which offers an Infrastructure-as-a-Service business model.
On April 29 of 2019, the global investment firm announced further growth of its U.K. platform through the acquisition of iWireless Solutions, a small cell provider that serves large, high profile venues in the U.K. (London Olympic Stadium, Twickenham Stadium).
Last November, Digital Colony purchased Opencell, which provides multi-operator indoor coverage and currently has more than 2,000 cells across 100 networks that are used by all four U.K. mobile network operators. Opencell was then merged with Stratto.
“Our goal from day one has been to build the leading digital infrastructure platform that delivers exceptional indoor and outdoor network solutions to the mobile network operators in the U.K.; combining Opencell’s capabilities and active networks with the Stratto platform helps us accelerate those goals,” said Ganzi, in a November 2018 press release. “We look forward to continuing to strengthen our relationships with our customers as well as positioning Digital Colony’s U.K. digital infrastructure platform as the recognized leader in the small cell sector.”
Outside the United Kingdom, Digital Colony Buys Fiber, Towers
Elsewhere in the world, Digital Colony has reached out and planted it flag. Last week, Digital Colony closed on the acquisition of Toronto-based, Cogeco Peer 1, a provider of colocation, network connectivity and managed services company. Cogeco Peer 1’s fiber business, which currently encompass more than 2,050 route miles of owned, dense metro fiber in Canada’s two largest urban markets, plans to become the country’s first neutral-host provider of small cell and 5G infrastructure and enterprise and wholesale fiber connectivity.
At the end of just Digital Colony completed its acquisition of Helsinki, Finland-based Digita Oy, which owns and operates the nationwide digital terrestrial television and radio broadcasting tower infrastructure network in Finland and is the largest independent owner of telecom towers in the country.
December 2, 2014 — Zayo Group, whose 81,000 route miles of dense metro and intercity fiber assets provide the backbone for cell tower backhaul, DAS and small cells, raised $400 million in an initial public offering last month. The stock, which debuted at $19 a share, is trading at more than $26 at this writing.
“It’s not just towers that people are excited about. Investor appetite is really strong for other facets of communications infrastructure,” said Marc Ganzi, CEO, Digital Bridge Holdings. “The Zayo IPO, which was extremely successful, was a strong signal that there is depth beyond towers in the comm infrastructure, permeating other asset classes, whether it is fiber or data center developers.”
Wells Fargo initiated coverage of Zayo Group Holdings with an outperform rating and $30 to $32 valuation range.
“Our positive thesis very much centers around the theme of the need for bandwidth infrastructure. We believe we are in the early stages of this demand — on both the wireline and wireless side,” wrote Jennifer Fritzsche, Wells Fargo senior analyst. “The fiber industry is one of dynamic change and growth. For Zayo specifically, we see many catalysts that will continue to drive revenue growth, including increasing demand for dark fiber, the early stage of small cell development and continued growth in wireless and wireline data traffic.”
Zayo’s dark fiber segment generates high-margin, recurring-revenue streams secured by longer-term contracts, and it has enough scale to create high barriers to entry for competition.
“Investors really crave the safety and the yield that comes from long-term contracted cash flows from investment-grade carriers,” Ganzi said. “It is a story that transcends towers and is now permeating other asset classes, whether it is fiber, data centers or small cells.”
Zayo has placed a greater emphasis on selling dark fiber compared with its competitors, which Fritzsche believes differentiates Zayo’s position as fiber-to-the-tower contracts come up for expiration.
“Dark fiber to the tower (FTTT) has a long runway for growth. While the initial FTTT rollout by carriers appears to be in later stages, Zayo sees growth opportunities in dark FTTT, with carriers signing dark fiber contracts for its scale and control benefits,” Fritzsche wrote
Fritzsche also thinks fiber backhaul will play a key role in providing small cell backhaul and that Zayo is more focused on opportunity than its rival, Level 3 Communications.
J. Sharpe Smith is the editor of AGL Link and AGL Small Cell Link newsletters.
Zayo Group plans to acquire FiberGate for $117 million. The dark fiber provider has 650 route miles of fiber in the Washington, D.C., metro area. The acquisition will add 130,000 fiber miles to Zayo’s metro network in and around the nation’s capital metro area. The FiberGate network also includes 315 on-net buildings and two recently completed expansions to Frederick and Baltimore, Md. Dark fiber is FiberGate’s only product and the network covers one geographic region – Baltimore, suburban Maryland, Washington, D.C., and Northern Virginia.
The acquisition is important to Zayo because FiberGate has deep metro fiber assets in the greater Washington, D.C.. area, Glenn Russo, executive vice president of corporate strategy and development, told Backhaul Bulletin. “Also, they have a business model that aligns well with Zayo,” he said. “FiberGate focuses on selling only dark fiber, a business and product Zayo has been a big proponent of, and has created a lot of momentum selling.”
Russo also told the Bulletin that Zayo will gain deep fiber assets in a key market and customer relationships in the nation’s capital that are typically hard to penetrate. “We feel we will be able to effectively serve the government vertical,” he said.
“The Washington, D.C./Northern Virginia area is a uniquely important geography for government, data centers and Internet connectivity,” said Dan Caruso, chief executive officer of Zayo Group, in a company release. “The combination of AboveNet’s and FiberGate’s networks will create an extensive fiber footprint in this strategic bandwidth corridor.”
The transaction is subject to customary approvals and will be funded from cash on hand. The transaction is expected to close by the end of the third quarter in 2012.