Zayo buying Allstream for USD347.6m

24 Nov 2015

Canada’s Manitoba Telecom Services (MTS) has signed a binding agreement to sell its national long-distance and enterprise telecoms unit Allstream to US-based corporate and wholesale communications infrastructure provider Zayo Group in an all-cash CAD465 million (USD347.6 million) transaction. Zayo says that acquiring Allstream’s fibre and colocation assets will establish it as ‘the only Pan-US/Canada Communications Infrastructure provider’. Allstream has over 9,000 route kilometres of metro fibre concentrated in Canada’s top five metropolitan markets (Toronto, Montreal, Vancouver, Ottawa and Calgary) that connect to approximately 3,300 on-net buildings. In addition, Allstream has a 20,000 route kilometre long-haul fibre network connecting all major Canadian markets and ten US network access points, and also operates colocation space in Toronto, Montreal and Vancouver.

The transaction is expected to close in the first quarter of 2016, subject to regulatory approvals, including national security approval and Competition Bureau permission. MTS CEO Jay Forbes said that having examined multiple bids, the deal with Zayo ‘fully recognised’ the value of Allstream, while expressing confidence that the sale ‘has a high certainty of closing’, following discussions with regulatory authorities to ‘help facilitate orderly approvals, including national security approval.’ TeleGeography notes that in October 2013 an attempt to sell Allstream to Egyptian-owned Accelero Capital for CAD520 million was blocked by a Canadian federal government decision, reportedly on national security grounds; MTS subsequently decided to cut a quarter of the workforce at Allstream, whilst also reducing CAPEX at the unit.

The Allstream division currently accounts for roughly CAD600 million revenue and approximately CAD100 million adjusted EBITDA (excluding restructuring charges). Zayo estimates that approximately half of Allstream’s revenue is a direct fit with its existing core business, and therefore plans to integrate this portion, using the same approach as for its Zayo UK and Zayo France divisions. The segmentation of the Communication Infrastructure portion of Allstream’s business (‘Zayo Canada’) and follow-on reporting into Zayo’s core business segments (Dark Fiber Solutions, Colocation & Cloud Infrastructure, and Network Connectivity) will take multiple quarters to complete. Karl Maier, president of Zayo International, stated that the group expected Zayo Canada to represent CAD300 million of revenue with a 40%-plus EBITDA margin and ‘a high single digit growth rate.’ The other half of Allstream’s business will be separated into two further standalone units: Voice & Universal Communications (representing around half of Allstream’s revenue) and Small Business (primarily enterprise voice).

MTS expects to report Allstream as discontinued operations from the fourth quarter of 2015 until the transaction closes. MTS has agreed to retain the pension obligations of retirees and other former employees of Allstream, and has also agreed to reimburse Allstream for certain solvency funding payments in respect of Allstream employees related to pre-closing benefits. After closing costs, MTS expects to realise net proceeds of approximately CAD425 million. By closing, MTS expects to record a non-cash, post-tax loss on the sale of approximately CAD75 million to CAD90 million, a portion of which will be recognised in Q4 results.

Zayo Group provides communications infrastructure services including fibre and bandwidth connectivity, colocation and cloud services to customers including wireless and wireline carriers, media and content companies, and other large enterprise sectors such as finance and healthcare. Zayo’s 87,000-mile network in the US and Europe includes extensive metro connectivity to thousands of buildings and data centres.

Canada, Bell MTS (formerly MTS), Zayo Group, Zayo/Allstream (Canada)