TheDeal: Duke Energy Joins With Alinda for Fiber Offering, Sources Say

NEW YORK (TheDeal) -- Duke Energyand Alinda Capital Partners LLC are bringing the power company's telecom fiber unit known as DukeNet Communications LLC to market, sources said.

The Charlotte, N.C.-based energy company and the Greenwich, Conn., private equity firm have retained RBC Capital Markets LLC to shop the unit, with the first bids due in early June, people close to the deal said.

As for valuation, one source said the unit could fetch $500 million or more, while another suggested that $450 million, or about 9 times Ebitda, would be more likely.

Trade publication Telecom Ramblings reported that the unit was on the market earlier in May, but did not include details about the bankers, bid schedule and a potential price range. Duke Energy declined to comment while representatives of Alinda couldn't be immediately reached.

Duke was dropping 1.2% to $68.92 in mid-day trading. Shares have lagged the S&P 500 in 2013 with Duke gaining 8.2% this year compared to the index's 24% advance.

Alinda paid $137 million for a 50% stake in DukeNet in 2010, and raised a $150 million senior secured credit facility with a five-year maturity to finance the transaction. RBC was one of the banks that arranged the facility. Prodigiously acquisitive Zayo Group LLC is the lead candidate heading into the auction. One source said, "It's Zayo's to lose."

Zayo, which is based in Louisville, Colo., has made more than 20 acquisitions since it was founded in 2007. By far the largest was the $2.2 billion purchase of AboveNet Inc. in 2012. Most have been smaller "tuck-ins" of fiber networks.

"Zayo is probably the most likely," said Donna Jaegers of D.A. Davidson & Co.

Zayo has backing from Battery Ventures, Centennial Ventures, Charlesbank Capital Partners LLC, Columbia Capital LLC, GTCR LLC, M/C Venture Partners, Morgan Stanley Alternative Investment Partners and Oak Investment Partners.

During Zayo's most recent earnings call, Jaegers asked co-founder and CEO Dan Caruso about acquisitions, noting that DukeNet could be available.

"The most important aspect of what we are doing right now is the organic performance of the business, not inorganic," Caruso said. "That's where more than 90% of our energy is."

The company would review properties that came on the market, he added. "We don't set any goals for wanting to do acquisitions," Caruso said.

AT&T Inc. is another possibility. Jaegers noted that the telecom has been upgrading its networks in the Southeast.

Palm Beach Gardens, Fla., telecom network engineering and construction company Dycom Industries Inc. gave an indication of the pace of AT&T's network construction in a Wednesday earnings call. Dycom said that its business with AT&T increased more than 86% from the prior year.

CenturyLink Inc. gained landlines in the Carolinas through its $11.6 billion purchase of Embarq Corp. in 2009. "They might be interested in this fiber footprint as well," Jaegers suggested.

TW Telecom Inc. could look at the company, too. Lumos Networks Corp., of Waynesboro, Va., operates in the region. Jaegers suggested the company would have trouble financing a deal without new funding because its debt is about 4 times Ebitda.

One question is whether private equity firms would look at DukeNet. Zayo's investor base reflects the sector's appeal. Another large fiber outfit, Lightower Fiber Networks LLC, has backing from firms such as Berkshire Partners LLC, Pamlico Capital and Abry Partners.

Some fiber companies have attracted double-digit Ebitda multiples. Jaegers suggested that prices could see some compression, because much of the growth from spooling fiber to cellphone towers have already been realized.

Written by Chris Nolter in New York

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