A VC's view: Buying and selling telecom providers

M/C Venture Partners is one venture capital firm that never lost faith in the telecom carrier business--and that tenacity is paying off, Gillis Cashman, general partner with M/C Venture Partners, told Connected Planet.

M/C recently inked a deal to sell Cavalier Telephone, a network operator that had been in the company’s portfolio for nearly a decade, to Paetec in a deal that “turned out very well,” for M/C, Cashman said. http://connectedplanetonline.com/independent/news/paetec-acquires-cavalier-091310/index.html

Remaining in the M/C portfolio (along with some non-telecom companies) are Lightower, operator of a regional fiber network in New England, and Zayo Bandwidth, operator of a nationwide fiber network. Zayo has bought about a dozen other companies over the last two to three years. “A lot of these companies were cash-starved and didn’t have the liquidity to capitalize on the growth that was happening,” said Cashman. Folding those companies into Zayo has enabled accelerated growth, Cashman said.

“What’s interesting about the fiber market and being a carrier’s carrier is that the more network you have to sell, the more efficient your sales force is,” said Cashman.

Them that’s got, gets

Despite the economic downturn that began in 2008, Cashman said both Zayo and Lightower have seen cash flow growth in the 20%- to 40%-range over the past two years. Wireless backhaul has been a particularly strong growth area.

Yet despite these growth opportunities, Cashman said the market is not seeing new green field entrants today. “The reason is that it’s a different demand set than in 1999 to 2000,” said Cashman. “That was about building out the core. This is really about the edge. Capital investment is tied to contracted revenue and carriers with core backbone networks are well positioned to address the edge.”

Zayo and Lightower continue to invest heavily in network expansion, with most of the investment focused on the network edge. Zayo is spending in the range of $70 to $90 million a year and “Lightower is a similar model,” Cashman said.


A public-private disconnect

Zayo would still consider additional acquisitions but Cashman said it has become increasingly difficult to find bargains. Zayo’s last three to four deals involved double digit multiples, he said.

“The organic opportunity is much more interesting,” said Cashman. “The pipeline at both companies is the largest we have seen in quite some time.”

Cashman noted, however, that values of publicly- traded companies have not kept pace with those of privately held companies. “There’s a disconnect between the private and public market,” he said. Noting that publicly-held AboveNet is trading at a multiple of only about eight, Cashman said investors in the public market “don’t really recognize the opportunity--you still have people asking questions about pricing and overcapacity.”