Zayo Group, a dark and enterprise fiber provider backed by DigitalBridge and EQT, has been named in press reports from the Wall Street Journal noting that the company has recently been in talks with Uniti Group (NASDAQ: UNIT) to buy the company at “a price of around $15 a share”, as well as acquire its “primary client, Windstream Holdings II”. At these pricing levels, Uniti Group would be valued at a market capitalization of $3.9bn and an enterprise value of ~$8.9bn.

With this dynamic ongoing, we detail the key parties involved, including Zayo Group and its financial sponsors DigitalBridge and EQT, as well as Uniti Group and Windstream Holdings, which both have significant financial backing from Elliott Management.

Background of Acquiror and Targets – Zayo, Uniti, Windstream

Zayo Group is owned by DigitalBridge Group, through its private equity fund Digital Colony Partners I, as well as private equity firm EQT, through its EQT Infrastructure IV fund. In March 2020, Zayo was taken private in a $14.3bn transaction – $6.3bn of equity (including co-investors) and $8.0bn of debt.

Uniti Group’s key shareholder, Elliott Management, is an activist hedge fund owning 20.5 million shares, equivalent to an 8.8% stake. Based on the $15 per share price referenced in press reports, Elliott’s stake would be worth $307m. At the same time, Elliott Management, alongside other former creditors, also owns Windstream which is currently privately-held. As Uniti Group’s largest customer, Windstream accounts for 65% and ~84% of Uniti’s revenue and EBITDA, respectively.

DigitalBridge and Elliott Management – Fiber Businesses

DigitalBridge has previously evaluated making investments in publicly-traded fiber businesses where Elliott Management has been a significant shareholder. Specifically, in August 2020, Reuters reported that DigitalBridge (formerly Digital Colony) showed interest in “buying a minority stake” in Crown Castle’s fiber business. At this time, Elliott Management, which owned a $1bn economic interest in Crown Castle, was pushing value creation initiatives at the company.

Digital Infrastructure Take-Private Transactions

Beyond its take-private of Zayo in March 2020, DigitalBridge has been involved in a number of the past and ongoing deals for publicly-traded digital infrastructure companies. Particularly, DigitalBridge has pursued companies including Boingo Wireless (acquired by DigitalBridge for $854m), Landmark Infrastructure Partners (owns a 19.9% stake), and Interxion (ultimately sold to Digital Realty).

One reason for DigitalBridge’s pursuit of publicly-traded digital infrastructure companies, is that private digital infrastructure valuation multiples are presently at a premium to those in the public markets.

Zayo Group – Overview

Zayo Group owns 126k fiber route miles and 13 million fiber strand miles in North America and Europe. Indeed, this represents an average strand count of 103 strands per route mile. Additionally, Zayo’s fiber network connects to 40k+ on-net buildings and 1.3k on-net data centers across North America and Europe.

Zayo Group Fiber Map United States
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Following its recapitalization by DigitalBridge and EQT, Zayo divested its data center business, known as zColo, to DataBank for $1.4bn. Additionally, Zayo appointed Steve Smith as its Chief Executive Officer to lead the newly streamlined fiber business.

Zayo’s key focus is currently its networks business. Specifically, networks offers services including dark fiber, mobile infrastructure solutions, ethernet, wavelength, wholesale IP, SONET, private lines, and dedicated internet.

Financials – Zayo Networks

Since Zayo is now privately-held, we observe the company’s most recently disclosed financials of its Zayo Networks segment, as a proxy for Zayo Group’s current financial position. For the three months ended December 31, 2019, Zayo Networks generated revenue of $502.5m and segment adjusted EBITDA of $291.9m. Therefore, on an annualized basis, these figures imply revenue of $2.0bn and adjusted EBITDA of $1.17bn.

Transaction Rationale – Zayo (DigitalBridge / EQT), Uniti, Windstream Holdings

Zayo has become more acquisitive, announcing in March 2021 its purchase of Intelligent Fiber Network (IFN). Undoubtedly, bolt-on network deals like IFN are accretive. However, Zayo requires transactions at the scale of Uniti / Windstream to generate meaningful cost synergies for its overall business.

Additionally, by combining Uniti Group and Windstream, DigitalBridge and EQT’s Zayo could accelerate the build-out of fiber broadband to “as many as a million more households”. This is because Windstream pays Uniti Group $750m+ annually in lease payments (i.e., Uniti Leasing segment). Indeed, the company could redirect these funds towards fiber builds.

Uniti Group – Overview

Uniti Group owns 123k fiber route miles and 7.1 million fiber strand miles. Indeed, this represents an average strand count of 58 strands per route mile. With its dense metro fiber, the company’s network passes 250k+ on-net and near-net buildings.

Uniti Group Fiber Network Q2 2021
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Beyond fiber, Uniti Group also has 2.3k small cells in service or in backlog.

Financials

In Q2 2021, Uniti Group reported total revenue of $268m and adjusted EBITDA of $216m. Therefore, on an annualized basis, these figures equate to revenue of $1.07bn and adjusted EBITDA of $863m.

Valuation

During Uniti Group’s Q2 2021 conference call, the company highlighted what it views as a “material disconnect between how the public market values Uniti’s equity” and its intrinsic valuation. The company deems that its Uniti Fiber and non-Windstream operations at Uniti Leasing should command a 15x to 20x cash flow multiple.

Uniti Group Valuation Compared to Peers
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Applying the mid-point of this valuation range (i.e., 17.5x) to Uniti’s 2021 Non-Windstream Adjusted EBITDA of $160m (Outlook), generates a valuation for the Non-Windstream Asset Value of $2.8bn. In turn, this implies a valuation for the remaining Windstream Master Leases of $4.8bn. Based on Uniti’s 2021 Remaining Adjusted EBITDA of $692m (Outlook), this indicates that Uniti’s Windstream Master Leases are being valued at a 14.4% yield or a 6.9x cash flow multiple.

Comparable Yields

Overall, the Windstream Master Leases’ implied 6.9x cash flow multiple compares to an 11.1x implied cash flow multiple from third-party valuations that Uniti has received. Additionally, Uniti Group highlights valuation benchmarks from public peers with cash flow multiples between 14.3x and 20.0x (see above).

At these comparable valuation ranges, Uniti’s implied share price would be between $20 to $30 per share. Therefore, Uniti’s analysis of its intrinsic valuation may be in-part why press reports also noted that discussions of an acquisition of Uniti Group at $15 per share “recently stalled over price”. Thus, the company likely desires a better offer.

Windstream Holdings – Overview

Windstream is a provider of managed network communications for enterprises across the United States. Additionally, Windstream offers broadband, voice, and video services to consumers and small businesses primarily in rural areas of 18 states. Specifically, as of Q2 2021, Windstream has 1.1 million consumer broadband customers.

Windstream Holdings Network Map Zayo Uniti
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Finally, Windstream supplies core transport solutions on its local and long-haul fiber network.

Financials

In Q2 2021, Windstream reported total revenue of $1.12bn and adjusted EBITDA of $281.6m. Therefore, on an annualized basis, these figures imply revenue of $4.5bn and adjusted EBITDA of $1.13bn. Additionally, Windstream disclosed net debt of $2bn as of June 30, 2021.

Valuation

Recent local exchange carrier (LEC) precedent M&A transactions, such as Apollo Global Management’s agreement to acquire Lumen Technologies’ incumbent local exchange carrier (ILEC) operations in 20 states, have traded at EV/EBITDA multiples of ~5.5x. Applying a 5.5x EBITDA multiple to Windstream’s business, would peg the company at an enterprise value of ~$6.2bn.

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