Starboard Value, which owns 4% of Zayo, delivered the excoriating letter to CEO Dan Caruso yesterday (PDF here), provoking Zayo to say the board was “actively considering and evaluating opportunities to enhance shareholder value, including an assessment of the company’s strategic priorities and opportunities, such as potential partnerships, business combinations and other transactions”.
In January Zayo turned down a bid reportedly valuing the company at $8 billion. In February it rejected a reported $7 billion bid. Both were from activist private equity bidders. Among the reported bidders were investors such as ISQ, which owns Hong Kong-based HGC Global Communications.
Starboard Value says in yesterday’s letter that “the company is deeply undervalued and that there are significant opportunities to create value” – implying that the company should look for an acquisition.
“Zayo owns a unique and valuable collection of communications infrastructure assets,” says New York-based Starboard. “Zayo is the largest independent fiber network operator in the United States and has one of the deepest, densest metro fiber networks in the country. Replicating Zayo’s network would require tens of billions of dollars and would take years to complete.”
But Peter Feld, managing member of Starboard Value, who signed the letter, says that “during its four year history as a public company, Zayo has produced poor shareholder returns and has consistently traded at a large discount to private market valuations”.
It says that “Zayo’s implied recurring revenue growth rates have declined from approximately 7.8% to approximately 3.6% over the past few years. This is in stark contrast to industry trends which suggest that the company should be growing at a significantly faster rate.”
Feld condemns the company for high management turnover. “In just the past few years, the company has employed four chief operating officers, three sales leaders, and has experienced a large number of other senior executive departures.”
He lists 15 departures, from Gary Friedman, former EVP of colo and cloud, in October 2016, to Andrew Crouch, former COO, in May 2018. “The level of management turnover at Zayo is virtually unprecedented when compared to similarly-sized healthy public companies,” says Feld.
In early 2018, at the Metro Connect conference, Caruso told Capacity that he had been rebuilding Zayo, the company he had started 11 years before. “It was hard – coming to the realisation that we were going to have to rebuild a lot of our senior team,” he said. As a result, he claimed, “the energy, ambition that Zayo always had has returned. The zest has returned. Let’s take that to the next level.”
But Feld of Starboard Value disagrees. “Zayo has been through years of organizational changes where customers and salespeople were left confused and frustrated by the disparate and ever-changing procurement and compensation hurdles across the company’s strategic product groups,” he wrote in yesterday’s letter.
“Zayo needs stability in leadership, a consistent and clearly articulated strategy, and appropriate and effective sales compensation plans that drive a balance of existing customer retention and new customer growth.”
He characterises the company’s plan to split into an infrastructure company and a services company as “hastily conceived”. The “share price subsequently declined 26% in a single day”, he notes. Zayo then cancelled the plan to split.
But what seems to have provoked yesterday’s letter was Caruso’s decision to cancel next week’s analyst day – announced weeks ago.
“This pattern of announcing strategic changes, and then shortly thereafter changing direction, is troubling and is an indication of a broader lack of strategic direction and oversight,” said Feld.
Now Zayo has responded to say the board and “management team welcome the views of all the company’s shareholders and value constructive input toward the common goal of enhancing the creation of shareholder value”.
Zayo postponed the analyst day to give “time to evaluate strategic alternatives that may enhance shareholder value”, though the company does not give details. It is evaluating “potential partnerships, business combinations and other transactions”.
