Zayo Buys AFS

Peter : On Rad's Radar?
| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

Zayo Buys AFS

As Rob Powell predicted, the self-proclaimed Fiber Bigot, Dave Rusin, CEO of Rochester-based American Fiber Systems, sold the company to Zayo. Some reports were that the sale price was $185M, but Zayo is stating that number is ridiculous. The original press release did not offer a price tag. 

Consider that Zayo financed $250M in debt at 10.25% in April. It's AGL acuisition is still pending. Zayo has a capital intensive business (building out fiber always is). And it's a VC backed company. Zayo smacks of a roll-up waiting for the right time to resell. I don't know when that right time will be because it looks like either Zayo is the sole bidder for these networks (AGL, AFS, etc.) or that they are the most aggressive bidder. Who then would be the buyer? Everyone I speak to that evens knows who Zayo is thinks it's just a roll-up.

Here's why I think that it has some issues as a long-term business:

Zayo's voice division was discontinued in March 2010. (See 3Q2010 earnings report). A little young to already give up on voice, but maybe it's outside its skill set. Makes me think that Z-Colo division will be closed in a year too.

The network is dissparate. Unconnected by its own fiber. And from my experience (and anecdotes from others) Zayo isn't sure where its assets are and takes a long time to deliver a quote. It's like dealing with KDL for heaven's sake.  I know they are powered but maybe they need a better database for network assets and quick quotes.

Like the AFS customer base, it is weighted towards the carrier, wireless and other wholesale segments. Wholesale telecom is not as profitable as retail. 

Zayo as a group does about $59M in revenue per quarter which is about $240M per year from $400M in invested capital. At 10% growth, how do you even pay back the note?

I get telecom math and accounting are fuzzy - ask MCI, Enron, Qwest. etc. But I don't see who can buy them or how they make it long-term. I ask why AGL, KDL, AFS, and other regional fiber companies are for sale. If fiber is king, why sell now? Makes no sense to me.

About American Fiber Systems:  Based in Rochester, New York, privately-held American Fiber Systems ( provides dark fiber and lit bandwidth services to carrier and large enterprise customers. Since its founding in 1999 by former Frontier Communications President, David Rusin, AFS has expanded to include 1,200+ route miles of metropolitan fiber networks across nine markets and regionally throughout the State of Georgia with 600 lit buildings.

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Hey Rad. I don't think we met.

Our voice division--Onvoy Voice Services ("OVS")--was NOT discontinued. It was spun out of Zayo Group LLC. It is still owned by Communications Infrastructure Inc. (CII), which owns both Zayo Group LLC and OVS. I am CEO of CII in addition to being CEO of Zayo Group LLC. OVS is a strong business--top line revenue of $45M is growing, it has strong profitability and generates solid free cash flow. The reason we separated it from Zayo Group LLC is that it is a different business than telecom and Internet infrastructure. All this information was disclosed and is on our web site.

You "conclude" wholesale telecom is not as profitable as retail. The meltdown caused a lot of sticky misconceptions about telecom--this is one of them. This misconception (and several others) is at the core of our investment thesis. We believe properties have been undervalued because of the hangover from the meltdown. Your "conclusion" (in our opinion) is one of the reasons we have had the opportunity to execute our plan. In recent years, more pundits would have agreed with your "conclusion" than mine. I wish they would continue to agree with you. Unfortunately, I think more and more are realizing there is more to the story.

As for our network being disparate, this is an accurate observation. We provide bandwidth infrastructure where we have network. We help our customers in some parts of the country. We don't provide services in others. We don't aspire to offer solutions across all geographies. The fact that we have multiple clusters to offer is a positive to our customers.

You make the point that it is difficult to get quotes out of Zayo. You say you experienced this directly. Please shoot me an email and we will help you sort through. We think we are good in this area but need to improve by a lot. We get very positive feedback from our major customers--but we are not satisfied because we think that the industry has not been good at quoting and delivering bandwidth infrastructure services. So the positive feedback we get is nice, but it does not reassure us as it is relative to the low expectations that exist in our industry. It is for this reason that we define our entire business strategy around being a telecom and Internet infrastructure company. Doing bandwidth infrastructure well is hard--but by making it our only focus we will get very good at it. is a key part of our operational strategy and we are extending its role in improving our intelligence on the physical assets.

I'd be happy to talk to you live. If you are interested, send me an email.

Thanks for paying attention to what we are doing.

"treated as a as a discontinued operation prior to March 12, 2010" refers to the accounting treatment. Since OVS was spun out of Zayo Group LLC, it is (from the perspective of Zayo Group LLC) a discontinued operation. However, it is a thriving going-concern's ownership just changed.

You are correct. The "conclusion" about wholesale is the popular belief. I hope it continues. It is from popular misconceptions that value creation opportunities can be found. Warren Buffet credits contrarian investing as the key to his success.

We do very little wholesale Internet Access. However, Cogent's entire business is wholesale Internet Access. They have been doing well for their stakeholders for several years. Those who offer retail Internet at higher price points have not done as well. How do you explain? You first instinct will be to explain in a way that is consistent your firmly held belief that wholesale is bad. My contention is that your belief is wrong. If you are interested in advancing your thinking, I would encourage you to re-visit your fundamental conclusion.

How do you explain Abovenet's profitability? Zayo Group's? Both of our businesses are "wholesale" by your definition. Again, I encourage you to resist the temptation to stick firm to your "belief" and challenge yourself as if this is evidence that you need to revisit your belief.

In our reported results, we shared our sales numbers for last quarter. If you sum Zayo Bandwidth, zCOLO, and ZEN, you get a number of approximately $1.5M MRR of new revenue sold during the quarter. That is a lot by any objective standard for a business of our size. How does this compute with your "conclusions" that our disparate networks or lack of knowledge about our assets are a hindrance?

We are not a reseller. Nearly all we do is on-net. We are in the component business. Our primary customers are big carriers and Internet companies. Time will tell how well we do, but our results to date have to be viewed positively by any objective person that has a good financial background


My apologies. I thought we were talking about the industry as it exists in 2010. I didn't realize this was a discussion of what went wrong in 2001. The telecom hangover is the source of the opportunities. While pundits like you still ponder on the impossibility of making money on wholesale Interent or on what went wrong as PSInet, execs at Cogent are getting quite wealthy.

Companies are for sale for two reasons. One, tax laws are changing. There is a major tax change that impacts how carried interest will be taxed. The house passed it in June. Senate is still debating but it is expected to pass. For many investors, it will impact their gains by 20%. That is a ton! If they sell and close by the end of this calendar year, they won't be impacted.

The second reason that they are for sale is because values are up. Why are values up? Because businesses are performing well.

Peter, I agree that MFN, PSInet,Netrail, and many many others were flawed business plans. They were flawed in the late '90s...and they'd be flawed if funded today. My term "meltdown hangover" refers to most people's inability to be able to objectively evaluate today's telecom businesses because of the scars from losing money during the meltdown.

I am not suggesting that all telecom is good today. Some is; some isn't. I am suggesting that the meltdown hangover continues to cloud judgment.

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