Zayo to buy Allstream for Canadian expansion

Zayo Group Holdings, Inc. (NYSE: ZAYO) plans to extend its fiber-optic network services operations into Canada with the acquisition of Allstream, Inc. Zayo will pay CAN$465 million in cash for Allstream, which currently is a wholly owned subsidiary of MTS, Inc.

This is the second time MTS has attempted to sell Allstream. Accelero Capital agreed to buy the unit for CAN$520 million in 2013 (see "Accelero Capital to acquire Allstream for $520M"). However, that deal failed to receive the necessary regulatory approval due to national security concerns.

Allstream has more than 9,000 route km of metro fiber network, concentrated in Canada's five largest metro markets: Toronto, Montreal, Vancouver, Ottawa, and Calgary. The fiber-optic network infrastructure connects to approximately 3,300 on-net buildings. Allstream also has an approximate 20,000-route-km long-haul network that Zayo says connects "all major Canadian markets" as well as 10 network access points in the United States (see map above).

Allstream operates colocation space in Toronto, Montreal, and Vancouver as well.

Zayo estimates that approximately half of Allstream's revenue is a direct fit with Zayo's existing core business. Zayo plans to separate this business from other parts of Allstream and integrate it into Zayo, using the same approach as it has followed for Zayo UK and Zayo France.

The segmentation of the communication infrastructure aspect of Allstream, which will become Zayo Canada, and subsequent reporting into Zayo's core business segments (Dark Fiber Solutions, Colocation & Cloud Infrastructure, and Network Connectivity) will take multiple quarters to complete, Zayo estimates.

"As we stand up Zayo Canada, we are targeting CAN$300 million of revenue, a greater than 40% EBITDA margin, and a high single-digit growth rate," said Karl Maier, president of Zayo International. "If we achieve this outcome and apply an EBITDA multiple similar to Zayo, the value of Zayo Canada will be substantial."

Allstream's other businesses will be organized into two additional segments: Voice and Universal Communications (which accounts for approximately one-third of Allstream's revenue), and Small Business (primarily enterprise voice). Each of these will be separated into standalone business units in parallel with the formation of Zayo Canada.

MTS has agreed to retain the pension obligation and related pension plan assets of retirees and other former employees of Allstream. It also has agreed to reimburse Allstream for certain solvency funding payments related to the pension obligations of current Allstream employees.

Zayo plans to fund the acquisition with existing cash and revolving credit facility capacity. It expects to close the deal in the first calendar year quarter of 2016, subject to customary regulatory approvals and closing conditions.

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