ZAYO GROUP HOLDINGS INC ZAYO S
August 24, 2018 - 4:00pm EST by
crawfordsville
2018 2019
Price: 35.44 EPS .05 0.00
Shares Out. (in M): 250 P/E 354 NA
Market Cap (in $M): 8,800 P/FCF 0 0
Net Debt (in $M): 5,700 EBIT 382 350
TEV ($): 14,500 TEV/EBIT 38 41
Borrow Cost: General Collateral

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Description

Zayo is a telecommunications service provider of internet and voice services focosed on the wholesale and enterprise customer. Zayo has long haul fiber assets and tail circuits that it leases to customers. I am recommending a short position in Zayo with the following thesis: Zayo is a highly leveraged roll up of subpar businesses that has negative organic growth and is being masked by tremendous amount of acquisitions. Zayo is currently looking into converting into a REIT which is ironic because there is no dividend paying capacity at the company to operate as a successful REIT. 

Here's a quick snapshot of the cap table:

Debt 5700
Equity 8800
EV 14500
EBITDA         1,172
CAPEX 789.9
INT 299
FCF               83
   
EV/EBITDA         12.37
EV/EBIT         37.96
EV/REV           5.57
DEBT/EBITDA           4.86
DEBT/EBIT         14.92

Here's a summary of the financials:

ZAYO            
  2018 2017 2016 2015 2014 2013
Revenue          2,604          2,200          1,721          1,347          1,123          1,004
operating costs          2,179          1,826          1,481          1,178          1,067             894
ebit              425              374             240             169                56             110
  18% 28% 28% 20% 12%  
ppe          5,447          5,016          4,079          3,299          2,822          2,437
total assets          9,216          8,739          6,727          6,094          4,981          4,152
lt debt          5,700          5,639          4,136          3,701          3,179          2,744
capex              790              835             704             530    
             
ebitda          1,172          1,117             935             783    
ebit              382              282             231             253    
             
CFO              971              909             714             605    
Diff Ebitda-CFO              201              208             221             178    

The short thesis on Zayo rests on a few main points. 

1. CFO is 200mm less than EBITDA for the last 4 years in a row rendering a EBITDA valuation metric less useful as a cash flow proxy

2. Over the last 4 years, Zayo has spent 2.6 billion in acquisitions and 2.8 billion on capex. When backing these investments to determine ebitda growth and returns on capital expenditure investment you can conclude two things:

a. Zayo's core organic growth is negative

b. Returns on capex are below 10%

acquisitions last 4 years          2,615
capex last 4 years            2,859
total spent            5,474
ebitda growth                389
Total Ebitda Growth over 4 years   7.11%
Annualized ebitda growth   1.73%

3. Zayo's reported EBITDA may be misleading as it is not cash EBITDA because reported revenue contains non-cash deferred revenue that is amortized from older contracts. 

4. Zayo has an inflated valuation multiple as it maybe an attractive acquisition target given it's fiber assets however there are no credible acquirers at this elevated valuation [CTL trades at 7x ebitda and has a 10% dividend yield]. 

5. Highly promotional CEO who claims he's a Warren Buffett fanaatic, however, CEO goes to more conferences than Tony Robbins and pro forma's all of his financials. 

6. Company trades at 3x PP&E, a metric similar to the peak of the dot com bubble reached in March 2000. 

7. Negiblge cash earnings which is the best metric to use for valuation. 

8. There's cumulatively 1.2 billion of deferred revenue on the balance sheet that is actually already collected cash and so EBITDA should be adjusted down by 150mm a year which alone should adjust valuation down by 15%. 

9. List of acquisitions over since 2007 - spending over $6 billion. 

Acquisition      Date      Acquisition Cost
        (in millions)
Memphis Networx   31-Jul-07   $ 9.2
PPL Telecom   August 24,2007     46.3
Indiana Fiber Works   September 28, 2007     22.6
Onvoy   7-Nov-07     70
Voicepipe   7-Nov-07     2.8
Citynet Fiber Networks   15-Feb-08     99.2
Northwest Telephone   30-May-08     5.2
CenturyTel Tri-State Markets   22-Jul-08     2.7
Columbia Fiber Solutions   30-Sep-08     12.1
CityNet Holdings Assets   30-Sep-08     3.4
Adesta Assets   30-Sep-08     6.4
Northwest Telephone California   26-May-09     0
FiberNet   9-Sep-09     96.6
AGL Networks   1-Jul-10     73.7
Dolphini Assets   20-Sep-10     0.2
American Fiber Systems   1-Oct-10     114.1
360networks   1-Dec-11     317.9
MarquisNet   31-Dec-11     13.6
Arialink   May 1 2012     17.1
AboveNet   2-Jul-12     2,210.00
FiberGate   31-Aug-12     118.3
USCarrier   1-Oct-12     16.1
FTS   14-Dec-12     109.7
Litecast   31-Dec-12     22.2
Core NAP   31-May-13     7.1
Corelink   1-Aug-13     1.9
Access   1-Oct-13     40.1
FiberLink   2-Oct-13     43.1
CoreXchange   4-Mar-14     17.2
Geo   16-May-14     292.3
Neo   1-Jul-14     73.9
Colo Facilities Atlanta   1-Jul-14     51.9
IdeaTek Systems   1-Jan-15     52.7
Latisys   23-Feb-15     677.8
Viatel   31-Dec-15     102.7
Stream Dallas Data Center   31-Dec-15     16.6
Allstream   15-Jan-16     297.6
Clearview   1-Apr-16     18.3
Santa Clara Data Center   3-Oct-16     11.3
Electric Lightwave   1-Mar-17     1,426.60
KIO Networks US Data Centers   1-May-17     11.9
Less portion allocated to the discontinued operations of Onvoy, LLC         -62.3
Total       $ 6,470.10

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Growth disappointment, FCF disappointment and inability to pay dividends if it were to convert to REIT. 

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