Zayo pairs opportunity with planning

with John Scarano

Carrier consolidation at the regional level in the United States is booming–thanks in part to the Zayo Group, which has made 15 acquisitions since its founding in 2007. The company now serves 141 markets and 23 states. Lightwave recently spoke with John Scarano, who founded Zayo with former ICG Communications colleague Dan Caruso, about Zayo's expansion strategy–which turns out to include much more than a well-worn checkbook.

Lightwave: Describe how acquisitions play into Zayo's business model.

Scarano: The original thesis that Dan and I solicited our original investors to buy into is that we would proactively approach potential sellers of networks and respond to their solicitations of us in a geographically agnostic way. And we take those assets, wherever disparately located, and build upon them to provide common services–services that look and feel the same–regardless of geography and regardless of prior ownership.

Our business, like so many other capital-intensive businesses, benefits by providing good, solid service in a similar way to the same customers across large geographies. If a customer that buys services from us in the Northeast would happen to like more down in Phoenix, AZ, our mantra is that they had better get the same look-and-feel kind of service Day 1 as we install it and for the long term as they maintain it.

The other side of the approach is when we're expanding the reach of the network, whether as the result of a stimulus win or some other customer-initiated activity. At that point in time, we do address customers' needs geographically. Zayo has fulfilled customer needs with fiber-based plant in geographies that are outside of Zayo's core geographies, where we have acquired network from third parties.

So the two-part approach is opportunistic from an acquisition perspective, both proactive and reactive. And from a customer perspective, we will deliver additional services to them where we have acquired networks, and also where they have needs and we may not have networks.

So do you always prefer to acquire assets or do you also lease and build?

I can cite one acquisition of our 15, which was one of our smallest, that was made in support of a particular customer opportunity. The second way [we address requirements where Zayo does not yet have infrastructure] is that we will extend the reach of the networks. We have ongoing construction activities in all four time zones of the U.S. And the third way is, although less so than self-construction, we will lease or purchase in the form of a long-term lease fiber from third parties.

How do you decide?

Build is always an option, lease may or may not be an option, and acquisition may or may not be an option. The way we make those decisions is a synthesis of time, cost, and quality. And time is measured as a function of what are the customer's requirements–can we deliver quickly enough via construction methodology. If other options are available that are lower cost or higher speed, we make that assessment across those three categories.

What makes a good acquisition target?

First and foremost, a high-quality fiber-based network that covers a geography that may or may not be adjacent to or overlap with in-place Zayo network. Secondly, we look at the customer profile for the business that leverages that network. Is the customer profile similar to what Zayo has in place and therefore relatively easy to absorb and manage efficiently? Or is the customer profile different, so that we are very careful to assess what additional capabilities we need to manage well that we don't manage presently–so that we're disciplined about not biting off more than we can chew.

Surely price plays a role…

Of course. The price is typically a function of a whole set of terms and, frankly, the motivation of the seller. If the seller is a bit nonchalant versus motivated to sell, that's different. We have a limited capacity to manage a limited number of acquisitions at any point in time. If sellers are motivated to work something out, they get our full attention. If sellers are dabbling in a sales process, that's just not terribly interesting.

Has the recession made deals easier or harder to make?

In the past year, the economic environment has had relatively little impact. I'd say there are three drivers to the increase in selling activity in the last year:

  1. The debt environments have loosened, so more debt is available.
  2. The tax environment has been uncertain. It doesn't seem to be any secret that our current Administration is fairly aggressively seeking to increase taxes. As a result, the ownership of these businesses who are mindful of their tax positions have made considerations in our judgment [about] 'should we sell now versus later' in part based on their view of taxation as a result of sale.
  3. Thirdly, and I would say the most important driver, is that largely because of the consolidation activity in the fiber infrastructure space, prices have increased. Therefore, owners who were less motivated in the past to sell have been more motivated in the past year.

Zayo also has won multiple broadband stimulus awards. What was your proposal strategy?

Our approach was let's dip our toes in the water, but systematically. We're not going to throw money at it recklessly, but let's dedicate several people to [discover], leveraging Zayo's networks and the ability to augment them, which entities could we be a great support for that would, together as partners, solicit for funds that would be looked at favorably. Zayo's networks are both in the NFL cities but also largely are in or traverse many rural parts of the country. So we're in a great position to support others collaboratively to make applications and win.

We ended up making very few applications for the first round, and we won one of those few. And with that experience, we pursued the second round–also narrowly and systematically. But now with a better understanding under our belt, we were even more selective with partners. And so far, the response has been fantastic, with two additional wins.

If sellers are motivated to work something out, they get our full attention. If sellers are dabbling in a sales process, that's just not terribly interesting.

John Scarano is president of Zayo Bandwidth as well as COO and co-founder of the Zayo Group. He's also held executive positions at MFS Communications, ICG Communications, and Level3 Communications.

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