Zayo Buys American Fiber Systems as Sector Consolidates

Just a few months after snapping up some dark fiber assets, growth-hungry Zayo Group is expanding again, with its 15th acquisition in three years.

The privately held, Colorado-based company made up of Zayo Bandwidth, Zayo Enterprise Networks and zColo on Wednesday said its buying American Fiber Systems Holding Corp., or AFS. Financial terms of the transaction were not disclosed. The Rochester Business Journal said a knowledgeable source put the amount between $185 million and $190 million. Soon after that report was published, Zayo issued a press release calling the figures materially inaccurate and overstated, yet it still did not reveal the price.

AFS, headquartered in Rochester, N.Y., boasts holdings in six metro markets throughout the country. All told, AFS brings more than 800 route miles of fiber to Zayo in cities including Boise, Idaho; Kansas City; Las Vegas; Nashville; Reno, Nev.; and Salt Lake City. AFS was founded in 2000 by David Rusin, a former Frontier Communications president, to provide dark and lit fiber to businesses. That approach fits well with Zayo Bandwidth: Most of AFS customers buy wholesale services, similar to Zayo Bandwidths sales and marketing strategy, Zayo said.

If all goes as planned, the Zayo-AFS deal will close in 90-120 days, once regulatory approvals are secured.

The AFS deal looks like a positive leap for Zayo, since it should add immediate revenue to the companys balance sheet. Indeed, M&A has given Zayos quarterly results a big boost of late. On May 12, Zayo reported a 53 percent jump in fiscal third-quarter revenue, from $38.4 million to $58.9 million, over the year-ago period, thanks in large part to the FiberNet Telecom Group acquisition. The higher sales didnt quite translate into profit, though Zayo lost $10.8 million in the three months ended March 31, compared to net income of $1.4 million a year earlier.

Zayos latest takeover comes as little surprise in a booming sector. Applications including wireless backhaul, consumer video, mobile Internet and data access, enterprise data storage and disaster recovery needs, all are driving unprecedented fiber demand. The communications industry has known for some time that fiber is its destiny, but the recent economic collapse halted most companies ability to fund major strategies. As the recession has eased, major players have predicted an uptick in fiber M&A.

Over the next three to five years, there will be another wave of consolidation, Zayo Group CEO Dan Caruso said at last falls COMPTEL conference. The big guys will get together and the number will drop to less than 10.