By Lalitya Sastrawinata (lsastrawinata@atlantic-acm.com)

Background:

Telecom provider Zayo, which recently won two substantial broadband stimulus grants as it pursues fiber development projects, is continuing its acquisition streak with an announcement that it has entered into a definitive agreement to acquire American Fiber Systems Holding Corporation (AFS), its 15^th acquisition since its inception in 2007, and its second in 2010.

Analysis:

• The Deal:  Financial terms of the deal have not been disclosed, but through this deal Zayo will add more than 800 miles of fiber route in six new metropolitan cities (Boise, Kansas City, Las Vegas, Nashville, Reno and Salt Lake City).  The company also will boost its route in Atlanta by 400 miles.  The transaction is subject to regulatory approvals and is expected to close in 90 to 120 days.
  
• Limited Fiber Up for Grabs:  Increasing demand for network capacity, driven largely by backhaul capacity from wireless providers, has eaten away at the fiber glut that existed 10 years ago.  Other applications, such as consumer video, mobile Internet access, data storage and recovery services, all are driving significant demand for fiber.
  
• The Strategy:  Zayo's strategy is to expand its customer base and boost its service areas.  Through this transaction, Zayo increases its presence in nine Tier 1 and Tier 2 metropolitan markets in the U.S.  The new properties in the Boise, Las Vegas, Reno and Salt Lake City markets will fill in the gap between Zayo's Colorado and Washington markets, while the Kansas City market provides Zayo with presence in the lower plains.  Additional routes in Atlanta go hand in hand with Zayo's previous purchase of AGL Networks, which helped to establish Zayo as one of the leading alternative providers in Atlanta.

The Bottom Line:

Zayo's move signals a new course of fiber player consolidation.  With fiber demand predicted to continue to increase and as the economy continues to recover, expect to see the likes of AboveNet, tw telecom and other RLECs to make their own moves in the near future.  According to Zayo Group CEO Dan Caruso, "Over the next three to five years, there will be another wave of consolidation...The big guys will get together and the number will drop to less than 10."  Companies looking toward future M&As should remain cautious, however, to ensure that they can realize potential synergies.