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.