Zayo IPO Highlights Backhaul, Small Cell Growth

December 3, 2014

By J. Sharpe Smith

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.

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J. Sharpe Smith is the editor of AGL Link and AGL Small Cell Link newsletters.