Topic: Spinoffs

Tax on Zayo spinoff limits its appeal

Zayo LISTEN:  

ZAYO GROUP HOLDINGS INC. $22 (New York symbol ZAYO; Manufacturing & Industry sector; Shares outstanding: 236.6 million; Market cap: $5.2 billion; Takeover Target Rating: Highest; No dividends paid; operates a fibre network across North America and Europe that stretches more than 209,215 kilometres. It is the largest independent fibre owner in North America.

The company first offered its stock to the public in October 2014 at $19.00 a share.

Zayo’s revenue jumped 93.3%, from $1.35 billion in 2015 to $2.60 billion in 2018 (fiscal years end June 30).

Most of that growth is due to acquisitions; since 2007, the company has spent $6.7 billion buying 45 related firms.

Zayo Group:

  • Largest independent provider of communications infrastructure with 3,700 employees
  • Its network connects 36,000 buildings in 403 markets
  • Operates 50 data centres in North America and Europe

Those include its 2016 purchase of Allstream from Manitoba Telecom Services (a recommendation of our Successful Investor newsletter prior to its takeover by BCE Inc.) for $465 million.

The company’s losses improved from $0.66 a share (or a total of $155.3 million) in 2015 to $0.31 a share (or $76.2 million) in 2016. Zayo then earned a profit of $0.35 a share (or $85.7 million) in 2017. Its earnings improved to $0.41 a share (or $101.9 million) in 2018.

In the three months ended September 30, 2018, overall revenue fell 0.3%, to $641.1 million from $643.1 million a year earlier. Sales were lower due to poor results for its Allstream fibre network segment. As well, Zayo signed $7.3 million in new service contracts (net of cancellations) for the quarter. That’s down 3.9% from $7.6 million a year earlier.

Excluding one-time items, the company earned $22.1 million in the quarter. That was down 5.2% from $23.3 million a year earlier. Earnings per share were unchanged at $0.09, due to fewer shares outstanding.

In November 2018, the company announced plans to separate into two publicly traded companies.

The first new company (InfraCo) will hold Zayo’s fibre infrastructure business. That business has annual revenue of $1.7 billion. The second company (EnterpriseCo) will provide connectivity services to large businesses and has annual revenue of $1.0 billion. The split is expected to take place in late 2019.

Zayo will complete the transaction by spinning off the EnterpriseCo to its shareholders.

Zayo wants to convert the remaining InfraCo business into a tax-friendly real estate investment trust. To facilitate that plan, investors will be liable for capital gains taxes when they receive their new EnterpriseCo shares.

Meantime, Zayo continues to attract lots of interest from private equity firms due to weakness in its recent results. Interested parties reportedly include KKR, Blackstone Group, and several other institutional investors and private equity funds.

The prospects of a breakup or a takeover increase the appeal of the company’s shares. However, its $5.7 billion in long-term debt is a very high 110% of its market cap. That adds considerable risk.

Zayo Holdings is okay to hold, but only for aggressive investors.


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