The $14.3 billion deal to buy Zayo, completed in March, began with a meeting five years ago at one of Capacity’s conferences. This 21st century dating story meant that Marc Ganzi, CEO of Digital Colony, and Jan Veseley, partner at EQT Infrastructure, were able to lead their respective private equity investment companies to a 50-50 acquisition of Zayo.
“We met the partners at EQT about five years ago at the Metro Connect conference in Florida. And so Jan and I became friends and we continued to compare notes as friends do,” Ganzi tells me.
In the short term, the takeover of Zayo has “created meaningful savings”, he says, “and that’s freed up a lot of cashflow”. That means the new owners “will continue to invest in the core plant of Zayo and we will continue to invest in new network spend and new long-haul routes, new lateral routes, new enterprise routes. We anticipate being incredibly busy in 2020 and beyond.”
When I interviewed him for Capacity in 2019, Ganzi would not talk about Zayo: the deal had been agreed by the carrier’s board but it still needed approval from regulators in the countries where Zayo operates.
But now he can. “We found a great partner in EQT,” he tells me. “We view the world in the same way from an industrial perspective. EQT was seminal.”
Joint bid
But it took some time after that first Metro Connect meeting for the two organisations to agree to a joint bid for Zayo. “When I made the move in March [2019] to really chase [Zayo] with a serious degree of vigour, it turned out EQT had the same idea at the same time,” Ganzi says from Florida.
“Mutual bankers connected Jan and myself, and we already knew each other, which was great. We surmised that both of us were looking at the opportunity.”
Veseley and Ganzi met again. “We got to partnership terms in about 24 hours.” The joint bid was announced in May 2019.
In February 2020 Ganzi, Veseley and Zayo CEO Dan Caruso were all back in Florida speaking at this year’s Metro Connect – one of our last events before the Coronavirus lockdown – and days later they were raising the final funds to complete the acquisition of Zayo.
“We were literally on the road for two weeks,” Ganzi says. “And it went incredibly well – we were just so pleased with the result. There were multiples of capital oversubscribed for the deal. Timing in life is everything.”
The money raised means “we can reinvest in our people, [and] we can reinvest in our local communities, building new networks”.
But what made him think this was a good company to buy? “The assets are always the key to any deal in digital infrastructure.” Zayo has a “unique” footprint in the US and Europe, he says. “It would be very difficult to replicate what Zayo has built over the last 13 years,” in terms of either replacement cost or opportunity cost. “It would require a solid 10 to 15 years to build it ourselves. And there’d be no guarantee we could actually build it at the same cost that we were buying Zayo for on a route-mile basis.”
Zayo’s network stretches about 140,000 miles and, at $14 billion, that represents $80,000 per route-mile. Add another $20,000 to $30,000 in general and administrative costs, “and a 10-year period to build it, and you end up spending more than $14 billion to replicate what Zayo had done, and you’d waste 10 years doing it”, he says. Zayo’s assets were “the reason why we leaned in so hard”, he adds.
Then there were the people. “We felt like Zayo had an incredible team, an extensive network of professionals, located throughout Europe and the US, that really understand the importance of connecting customers and the ability, most importantly, to work fast, provision bandwidth quickly, and satisfy customers’ needs.” He adds: “The people played a big part in the transaction. We know a lot of the senior leadership there, and we’ve got a lot of confidence.”
At the top is Caruso, who co-founded Zayo in 2007 and took it through dozens of acquisitions over the following 12 years, including Abovenet in the US, Geo in the UK and Neo in France.
One of the most intriguing was Spread Networks, which had spent an estimated $300 million on a directly straight fibre from New York to Chicago in order to achieve a round-trip time of only 13ms, about 1.5ms faster than competitors. Zayo bought it in 2017 for $127 million, less than half price.
How will being private help Zayo? “We felt that would make Zayo more competitive as it went up against the big guys such as AT&T, Verizon, CenturyLink, BT, Telefónica, and the larger operators. We’ve come to learn in building towers and small cells and data centres for the last 25-26 years is that all of this requires fibre. Fibre is the connective tissue that binds it all together.”
A year ago, in Ganzi’s previous interview with Capacity, he told me how he was working at a real-estate investment trust when he discovered some of the company’s buildings had “a couple of these things called ‘antenna leases’ with cellular telephone companies”.
They were 30-year leases on “space that was deemed a liability, the roof, collecting rain. When people started paying us thousands of dollars for rooftop space, a light went off in my head.” Today, he recognises the importance of fibre. “You’re going to need fibre,” he says, and: “Fibre and the need for fibre are only going to increase over time. Those are our guiding principles.”
We were speaking on a Thursday in late March, a few days after the Covid-19 lockdown had started in the UK, but almost three months since the disease had started spreading out from Wuhan.
Given the uncertainty of the past few months would he have made the same offer for Zayo as he did in 2019? “I would,” says Ganzi, without a hint of hesitation. “I don’t believe our conviction has changed. Once again, just based on pure replacement cost and the density of the network, replicating the team and just the timing of the opportunity, it all comes together quite nicely, and I would say also we found a great partner in EQT.”
That Metro Connect conference in Florida was the first time Ganzi had met people from EQT. Veseley and he exchanged “a couple of different ideas at that time”, but they didn’t come to fruition. “Then we said, you know, ‘If something big comes along, let’s keep the lines open’,” he recalls. And so the idea of buying Zayo came up. “We absolutely see the ecosystem in the same way, which is that there is a massive opportunity to buy wholesale connections to data centres and towers and to provide long-haul routes to other carriers and be a carrier’s carrier, which has always been where Zayo has performed at its best.”
Two years ago, at Metro Connect 2018, Caruso told me of his plan to refresh some of the management. That’s progressing, says Ganzi now.
“We’ve already put in a new head of sales; we’re looking at deepening the executive leadership team in other parts of the company and in Europe, and so we don’t think the company will stand idle.”
There will be more changes. “We’ll work with the board and we’ll work with Dan to put the right people in the right places, and ensure the success of the business. Change is always good, and change is always inevitable. One thing we know that Dan Caruso is pretty good at is being an agent of change.”
No demerger
One of Caruso’s ideas has been rejected, though: a proposal to demerge Zayo into an infrastructure company and a services company. Is that idea still on the table? “I don’t think so,” Ganzi tells me.
“There is a time and a place where Dan and the board thought that might be advantageous.”
That was because there were “concerns around the wholesale business and the churn associated with the enterprise business”, but today “as a combined business it still makes a ton of industrial sense, and so we’ll continue to keep the business operating as one entity”.
However, “if there are parts of the business that are not core to what we’re trying to accomplish in the infrastructure space, we’ll either spin those units out or we’ll sell them.
“We think there is an opportunity to continue to grow the enterprise business and densify our efforts with on-net bookings. ... Being focused on those two verticals – enterprise and wholesale – are so important.”
Back in the long-lost days of February 2020, Christian Sindling, the CEO of EQT, said in a conference call that he was looking at merger possibilities. “There are some firms that are a really good fit with EQT. We are going to be careful about buying too-large organisations. We want sellers to become shareholders [in EQT] rather than get a pile of cash.”
So this prompted me to ask Ganzi, given all the things he had told me about his relationship with EQT, whether that was something he might be pursuing.
“We’ll continue to collaborate with EQT in digital infrastructure,” he replies.
“We think that’s where we hold a strong passion, like they do. I can’t go any deeper than that. Don’t read through that, either. There’s not a read-through there.”
