DigitalBridge Group and EQT Infrastructure closed a USD 14bn deal to take Zayo Group Holdings private in early 2020 with plans to streamline the telecom infrastructure company. 

Now close to three years into the deal, Zayo executives are forecasting that their investment and “optimization” will deliver lower costs and improve booking and churn metrics in 2023, President Andrés Irlando told Infralogic. 

Since 2020, Colorado-based Zayo has allocated capital to the “four pillars” of its optimization strategy: making various operational processes more efficient, focusing on organic over inorganic growth, reworking Zayo’s cost structure and pursuing M&A opportunities that add capabilities to the overall organization. 

The efforts are aimed at turning Zayo—formed through 45 acquisitions over 13 years--into a mature fiber-optics transport firm, Irlando said. 

For its first years operating as a private company, executives focused on funding organic growth, which has put pressure on the company’s financial metrics, at least in the short term. 

Zayo’s adjusted EBTIDA, roughly USD 1.2bn prior to the buyout, declined to around USD 900m TTM as of the end of September, said two sources familiar with the company. Its leverage ratio jumped from 7x to roughly 10x EBITDA, but it continues to have ample cash and revolving credit availability. 

“We have seen some pressure on margins over the last year driven principally by two things: One is the investments in our network and our operations as part of that optimization strategy,” Irlando said. “When you go private you know there’s the opportunity to optimize a number of things, so we had this J-curve thesis related to that.” 

The second factor weighing down Zayo’s margins is the three acquisitions it made over the past couple of years. In June 2022 it completed its buyout of E-Rate player Education Networks of America, while it announced its purchase of QOS Networks from M/C Partners a year ago. Zayo executives also decided to “reintegrate the growing parts” of business communications firm Allstream, a company that was initially spun-out as a separate entity as part of Zayo’s take-private deal. 

Irlando and team have seen these investments begin to pay off. 

"One of the things that we put in place about a year-and-half ago is what I describe as a best-in-class, professionalized churn management program," he said. 

Along with new hires, Zayo incorporated A.I. and predicative analytics to forecast which customers might leave and for what reasons, giving relationship managers an opportunity to keep critical accounts in place. There were several months in 2022 when executives saw Zayo achieve churn rates under1% - the monthly industry average - as a result of the new strategy, he said. Prior to going private, the old Zayo team at times found churn an issue that sell-side analysts would highlight during earnings calls. 

The company also ramped up capex into dark haul dark fiber networks, subsea cable projects and improving existing infrastructure.  

Last year was the company's biggest network buildout in its history with some of those initiatives featuring payback periods of three years. For 2023 and beyond, Irlando said the company will begin pulling back on capex, "normalizing" it going forward as it slows its pace of building. Along with monetizing the networks over the next several years, this will help bolster earnings.  

With regards to new projects the company undertakes executives will eye opportunities in the public-private partnership procurement arena. 

"We're pivoting our view from just totally privately financed (projects) to looking for more public-private partnerships around middle mile in particular but also rural areas," Irlando said, attributing the adjustment in strategy to the federal government's recent infrastructure bill that provides USD 65bn in broadband subsidies. "With public funding there's upfront capital now available where the projects are net capital positive."  

Zayo will also continue to focus on its E-Rate program - government subsidies for networks that are built for schools and libraries.  

"We won't just apply for E-Rate funds to build a network because it tends to be costly and time-consuming that utilizes a lot of capital," he said. "But we will do it if it's clear that having an anchor tenant (school, library) will create a broader ecosystem and opportunity."