What happened to Zayo?

Zayo Group Holdings Inc. was a publicly traded telecommunications infrastructure company based in Boulder, Colorado. Founded in 2007, Zayo grew rapidly through acquisitions to become one of the largest bandwidth infrastructure providers in the US and Europe. However, in 2019 the company was taken private in a $14.3 billion sale to Digital Colony Partners and EQT Infrastructure. This article will explore the history of Zayo, its growth and acquisitions, the factors that led it to be taken private, and what the future may hold for the company under new ownership.

The Beginnings of Zayo

Zayo was founded in 2007 by Dan Caruso and John Scarano, two telecom entrepreneurs who previously worked together at ICG Communications. They saw an opportunity to build a new bandwidth infrastructure company focused on fiber optics and high-capacity bandwidth services. The company was initially funded by private equity firms including Columbia Capital, M/C Venture Partners, Oak Investment Partners, and Charlesbank Capital Partners.

Zayo’s early strategy focused on acquiring regional fiber network providers across the US. By aggregating these networks, Zayo aimed to create a national footprint of dense metro fiber in major cities connected by long-haul fiber routes. This would provide high-bandwidth infrastructure services to wireless carriers, media companies, enterprises, and other bandwidth-intensive organizations.

Key Early Acquisitions

Some of Zayo’s key early acquisitions included:

• 2008 – Indiana Fiber Works for $42 million
• 2010 – American Fiber Systems for $114 million
• 2011 – 360networks for $345 million
• 2012 – FiberGate for $117 million
• 2012 – AboveNet for $2.2 billion

These deals dramatically expanded Zayo’s fiber assets and helped establish its reputation as an aggressive acquirer in the fiber space. The AboveNet deal in particular propelled Zayo onto the national stage, making it one of the top 5 fiber network providers in the US.

Rapid Growth Through Acquisitions

Fueled by private equity and debt funding, Zayo continued its rapidfire acquisition strategy from 2013 to 2016. Some major deals during this high growth period included:

2013 – 2021 Acquisitions

This series of acquisitions expanded Zayo’s network to over 130,000 route miles of fiber, with connectivity to thousands of data centers, enterprise buildings, and cell towers across North America and Western Europe.

Financial Growth and IPO

Alongside its acquisition strategy, Zayo invested heavily in expanding and densifying its fiber network footprint organically. This network expansion, combined with strategic acquisitions, allowed Zayo to achieve rapid financial growth:

• Annual revenues grew from $13 million in 2007 to over $2.4 billion by 2016
• Adjusted EBITDA increased from $4.7 million to $979 million over the same period

To fund this growth, Zayo took on increasing levels of debt. By 2016, the company had accumulated $5.4 billion in total liabilities. Despite this debt load, Zayo was able to successfully complete an initial public offering (IPO) in October 2014, listing on the New York Stock Exchange. The IPO raised around $560 million in proceeds for Zayo.

As a public company from 2014-2019, Zayo continued expanding its fiber assets in the US, Canada, UK, and France, both through acquisitions and organic network builds. The company touted its value proposition as a bandwidth infrastructure provider enabling high-speed connectivity for a wide variety of bandwidth-intensive industries and organizations.

Challenges Emerge: Slowing Growth and High Debt

After a decade of explosive growth through M&A, Zayo began facing challenges by 2017-2018. Some of the issues that emerged included:

Declining Revenue Growth

• Revenue growth slowed from over 30% annually to low single digits
• Organic revenue excluding acquisitions was flat or declining
• Competition was increasing in fiber markets

High Debt Load

• Zayo was carrying over $5 billion in debt by 2018 with limited cash flow
• This constrained ability to invest in further network expansion
• Debt service costs were dragging on earnings

Management Challenges

• Cofounder Dan Caruso stepped down as CEO in 2018
• New CEOs struggled to execute a clear strategic vision
• High executive and founder turnover created uncertainty

These challenges led investors to lose confidence in Zayo’s growth trajectory as a public company. The stock declined over 50% from 2017 highs as revenue growth flattened.

Privatization Deal with Digital Colony and EQT

With Zayo struggling as a public company, in May 2019 it announced plans to be acquired by private equity firms Digital Colony Partners and EQT Infrastructure IV fund in an $8.2 billion deal. The purchase price represented a 32% premium over Zayo’s trading price at the time.

Some key details about the privatization deal:

• Transaction valued at $14.3 billion including debt obligations
• Consortium of investors led by Digital Colony and EQT Fund
• Took Zayo private as a privately held company
• Funded by $3.6 billion in equity and $6.6 billion in new debt
• Closed in March 2020 after shareholder approval

For Digital Colony and EQT, the rationale was to take advantage of Zayo’s underlying fiber assets and turn around the business away from Wall Street scrutiny. They believed Zayo’s infrastructure still had long-term value that could be optimized under private ownership.

The deal was seen as a disappointment for some early Zayo investors like founders and private equity backers. But it allowed them to exit at a premium valuation after Zayo struggled as a public company.

Outlook Under New Ownership

Since going private in 2020 under Digital Colony and EQT ownership, Zayo has operated out of the public eye. Very limited information has been made available about the company’s recent strategy and financial performance.

Based on past patterns in similar telecom deals, it’s likely the new ownership group is rationalizing Zayo’s portfolio of assets, investing in key network expansion projects, and rightsizing the cost structure. They are likely aiming to improve profitability and cash flow generation from Zayo’s infrastructure assets.

Some analysts speculate the owners may look to eventually take Zayo public again or sell the business to another infrastructure investor. For now, the company seems focused on improving operations as a privately held business.

Potential Future Scenarios

Some possible future scenarios for Zayo under Digital Colony and EQT ownership include:

• Hold and improve operations as a private company long-term
• Invest in network expansions and new technology to increase value
• Sell the business to another infrastructure investor like a pension fund
• Merge with other fiber operators to gain scale
• Eventually pursue another public listing or IPO

Much likely depends on how successful Digital Colony and EQT are in improving Zayo’s financial performance and leveraging its infrastructure assets. There are likely significant opportunities to optimize operations, expand margins, and invest efficiently in network growth.

Conclusion

Zayo grew rapidly from a small startup to one of the largest bandwidth infrastructure companies through aggressive mergers and acquisitions. But high debt levels, slowing growth, and management challenges led to underperformance as a public company. Under new private equity ownership, the company now has the opportunity to rehabilitate operations and strengthen the value of its extensive fiber networks away from short-term investor pressure. With its well-situated assets, Zayo still has long-term potential to be a major provider of high-capacity fiber infrastructure. But realizing that potential will depend on execution by the new owners in improving the efficiency and competitiveness of Zayo’s business.