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Zayo Shares Up on Takeover Speculations by P-E Consortium

Zacks Equity Research

According to media speculations, Zayo Group Holdings, Inc. ZAYO appears to be pondering about its potential takeover by a private-equity consortium which includes Digital Colony Partners, EQT and Stonepeak Infrastructure Partners.

The fiber optic bandwidth infrastructure company could be a few days away from this talk-of-the-town transaction, with a price that is expected to touch $38.50 per share. Notably, shares of Zayo have recorded an average return of 38.6% compared with the industry’s rise of 43.4% year to date.



In February, media reports came to light that Zayo was being approached by Blackstone Group and Stonepeak. In January, the company turned down an offer of more than $6 billion from a consortium led by Blackstone, including KKR & Co., I Squared Capital, GTCR and Charlesbank Capital Partners. The offer was nearly $30 per share.

Zayo’s extensive network footprint, diversified product portfolio and ability to penetrate in different markets are laudable. It has also been attracting takeover interest from private equity funds since November 2018.

The company also announced plans to split into two public companies — Zayo Infrastructure or InfraCo and EnterpriseCo — to focus better on its operations. One of the businesses will focus on providing core communications infrastructure while the other will leverage infrastructure to provide solutions for a broad set of enterprise customers. Also, it has been assessing multiple options to achieve its long-term objectives while enhancing shareholder value.

What’s Attracting Others

Zayo is well poised to benefit from a diversified blue-chip customer base that comprises the largest and most sophisticated users of bandwidth. It aims to grow the network business at 5% and beyond while controlling expenses to boost OpEx efficiency.

The company emphasizes on less than 12-month payback deals while leaning into strategic investments like E-Rate deals, Mobile Infrastructure and Long-haul fiber. Such deals leverage its existing assets in conjunction with new builds. These are likely to deliver strong free cash flow yields and attractive returns on invested capital. For 2019, it expects the network business to deliver 4-6% growth while sustaining more than 56% EBITDA margin and at least 20% adjusted unlevered free cash flow margin.

The company continues enhancing global reach by expanding its fiber footprint and forging partnerships with local providers. It has been experiencing broad-based demand across all the customer verticals, which should drive its top line.

It is to be seen how investors react to the buzz over Zayo’s takeover by private firms. Beginning 2019, the stock has enjoyed sunshine promoted by industry grapevines.

Zacks Rank & Stocks to Consider

Zayo currently carries a Zacks Rank #2 (Buy). A few other top-ranked stocks in the broader industry are CommScope Holding Company, Inc. COMM, Bandwidth Inc. BAND and Juniper Networks, Inc. JNPR. While CommScope sports a Zacks Rank #1 (Strong Buy), Bandwidth and Juniper carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

CommScope has long-term earnings growth expectation of 4%.

Bandwidth has long-term earnings growth expectation of 10%.

Juniper has long-term earnings growth expectation of 7.1%.

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