Rumors that Make You Go Hmm

The Wall Street Journal broke a story about the apparent interest from Zayo for purchasing Uniti and Windstream. It was reported that Zayo has been in talks with Uniti since June. For those that might not keep up with the nuances of the industry, Uniti owns all of the network access of Windstream.

Windstream decided in January 2014 to spin off and move its copper and fiber assets into a REIT, which is a real estate investment trust, a formal kind of investment vehicle defined by law. A REIT generally owns real estate like apartment buildings, shopping malls, or perhaps specialty real estate like storage buildings or college dorms. REITs sell ownership shares to the public, similarly to stocks. An investor in a REIT is making a real-estate investment while gaining safety by spreading risk across multiple properties. Since its formation, Uniti has added other assets to the portfolio, but the Windstream assets still represent 70% of its assets.

It makes sense that Zayo would be interested in Uniti. Zayo is the largest independent owner of long-haul fiber, and Uniti owns significant fiber assets. Zayo was created to grow by acquisition and purchased over thirty fiber networks between 2007 and 2014. Zayo now owns over 130,000 miles of fiber in the U.S. and Europe. In March of 2020, affiliates of Digital Colony Partners and the EQT Infrastructure IV fund purchased all Zayo stock and took the company private.

The rumor that Zayo is interested in Windstream is a puzzler. Windstream is a traditional large telephone company that has also grown through acquisition. Windstream was originally formed with the joined assets from Alltel and Valor (GTE Southwest). Windstream went on to buy other telcos, including CT Communications (Concord Telephone Company), D&E Communications, Iowa Telecom, and Nuvox.

It’s hard to think of a reason why Zayo would want to get mired in being a last-mile ISP, especially with an acquisition that is still laden with copper DSL networks. When Windstream recently emerged from bankruptcy, it announced that its future involves building a lot of last-mile fiber – but that fiber has still to be built. Somebody is going to have to invest a lot of money to meet Windstream’s stated fiber goals.

It’s conceivable that Zayo is being enticed by the many billions of federal grants on the horizon that would come from a federal infrastructure plan. But even with grant funding, rural fiber networks are never going to generate the kind of returns that a company like Zayo wants – not to mention the daily headache of Zayo becoming enmeshed in becoming the ISP to rural customers.

We already know what that kind of merger looks like. We saw a merger between CenturyLink and Level 3 a few years ago that was a bigger version of this merger. Level 3 was a high-flying transport provider with stock that was rapidly climbing as the company consistently beat earnings expectations. Level 3 was perfectly poised for the broadband explosion we’ve seen over the past decade.

But that merger almost immediately dragged Level 3 down and the merged companies have a lot more of the earnings characteristics of CenturyLink than of Level 3. It’s hard to think that Zayo wants even a small piece of what happened to Level 3. Copper networks will be an albatross around anybody’s neck.

The only reason I can fathom for buying both companies would be to merge Windstream with its former last-mile assets still owned by Uniti and then spin off the recombined telco. This would allow Zayo to keep Uniti’s long-haul and business sales units and not have to own or touch Uniti’s last-mile networks. A recombined Windstream would be in better condition to pursue fedral grants.

However, the telecom world has never failed to entertain us with deals that the rest of the industry saw immediately as disasters. I don’t know anybody who thought that Level 3 could somehow solve CenturyLink’s last-mile woes. Nobody thought AT&T could become a media company through the acquisition of Warner Media. Fifteen years later, we’re still wondering what possessed Verizon to buy AOL and Yahoo. Does Zayo really want to join this illustrious group?

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