Zayo acquires Allstream for $348M, gains instant Canadian fiber presence

Zayo is acquiring Allstream, MTS' business unit, for $348 million, giving the service provider an immediate fiber network presence in Canada.

Similar to earlier acquisitions it has made in the U.S. and in Europe, the key driver behind the Allstream acquisition is that it enhances its fiber and colocation asset base.

Out of this deal, Zayo will gain over 9,000 route kilometers of metro fiber facilities concentrated in Canada's top five metro markets -- Toronto, Montreal, Vancouver, Ottawa and Calgary -- that connects nearly 3,000 on-net buildings.

Complementing the local metro network is Allstream's additional element of the network, a 20,000 route kilometer long-haul fiber network connecting all major Canadian markets and 10 U.S. network access points. In addition, Allstream operates colocation space in Toronto, Montreal and Vancouver.

Allstream has about $449 million CAD $600M revenue and Adjusted EBITDA (excluding restructuring charges) of approximately $75 million.

Zayo said that about half of Allstream's revenue is a direct fit with its existing core business. Its investment plan is to separate its business from other parts of Allstream and integrate it into Zayo, using the same approach it has adopted for Zayo UK and Zayo France. Under this plan, Zayo will retain a Canadian brand and presence.

It said it expects the Communication Infrastructure portion of Allstream's business ("Zayo Canada") and follow-on reporting into Zayo's core business segments (Dark Fiber Solutions, Colocation & Cloud Infrastructure, and Network Connectivity) will take multiple quarters to complete.

Zayo will organize the other half of Allstream's business into two additional segments: Voice and Universal Communications (approximately one-third of Allstream's revenue) and Small Business (primarily enterprise voice). With the formation of Zayo Canada, each of these will be separated into standalone business units in parallel. 

Macquarie Research said in a research note that the acquisition of Allstream will provide Zayo with complementary fiber assets and revenues.

"We estimate [roughly] one-half of Allstream revenue lines up well with existing Zayo business segments and that the other half of 'legacy' revenue will be managed for cash flow and potentially sold off over time," Macquarie said. "We believe Zayo liked the pan-Canada fiber footprint. Allstream has a national fiber network with metro fiber loops in major urban markets."

Allstream's assets will also give Zayo what it needs to fend off larger competitors like Bell Canada and Telus and the eventual entrance of Rogers into these business markets. 

"Bell and Telus are major incumbent competitors and Rogers has expressed interest in entering the space," Macquarie said.

While Zayo's bid for Allstream is new, the sale of Allstream has been brewing since 2012. An earlier attempt to sell the unit to Cairo, Egypt-based Accelero Capital Holdings in 2013 for $540 million failed after the Canadian government blocked the deal due to security concerns.

Earlier, MTS began searching for a U.S.-based investor for its Allstream business services unit, following failed attempts to secure a Canadian investor.

By selling Allstream, MTS will be able to focus more of its attention on its core telecom businesses, such as its IPTV offering and expanding its wireless network.

For more:
- see the release

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