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Data needs turn regional Fiber Networks into potential buy-out targets in 2011 January 12, 2011

Posted by TelUS Consulting Services in CLEC catagory.

After the telecom bubble burst a decade ago, fiber was a dirty word and CLEC’s were pretty much taboo. Now, the fiber-optic network business is enjoying a resurgence, particularly for metro fiber, the high-capacity lines that connect a city’s office buildings, data centers and cellular towers to the Internet.

There have been 14 acquisitions in the industry this year alone and 45 since the fiber market began its turnaround in 2006. There’s a shortage of metro fiber, and the demand is just going through the roof.  Lightower Fiber Networks for example, a fiber company serving the Northeast that has acquired five other companies since 2008. The past couple of years have seen demand accelerate unlike anything that has been seen in the 30 years I have been in the industry.

Data-heavy devices like Apple Inc.’s iPhone and iPad have put growing strain on cellular networks, particularly the connections between cell towers and land-based networks, where bottlenecks often form. Meanwhile, Web video services, such as those offered by Netflix Inc., and so-called cloud computing, in which data are stored off site and accessed via the Internet, are placing a premium on fast connections.

While there is a still an abundance of the long-haul fiber that connects cities to one another, there is an increasing demand to replace slower copper cables with faster fiber in much of the “last mile” of the Internet—the direct connections to users. Private-equity investors have been piling in, and the price for metro-fiber companies has shot up. Buyers were paying five to seven times a metro fiber company’s cash flow in acquisitions from 2007 to 2009. In 2011 that could increase to more than 10 times.

In December, Court Square Capital Partners bought Fibertech Networks in a deal valued at more than $500 million after the company had put itself up for sale earlier in the year. Fibertech, based in Rochester, N.Y., serves 24 American cities in the Eastern and Central regions. The deals have turned a market that once had many small participants and a few giants into one made up of a handful of regional and national players. Analysts say the consolidation has helped stabilize the prices fiber owners can charge customers like banks, phone carriers and universities that lease their networks. There are few small fry left to acquire, but some in the industry expect consolidation among some of the larger companies over the next few years. Companies could also decide to test the public’s appetite for fiber. Zayo Group, one of the nation’s larger fiber companies, with networks in 27 states and the District of Columbia, is weighing the possibility of an initial public offering next year, in addition to other funding or merger options.

Fiber-company executives and private investors say however that the industry’s reputation still is tarnished by the tech bubble in the late 1990s, when investors pumped money into fiber companies, many of which ended up in bankruptcy court after a glut developed. People lost so much money during the meltdown that most investors did not want to touch fiber-based” telecom, I myself am one of those.

Zayo has since acquired 15 smaller fiber companies in deals valued anywhere from $3 million to $100 million. In June, it bought American Fiber Systems, a metro fiber company with lines in underserved cities like Boise, Idaho, Salt Lake City, and Reno, Nev., in a deal valued at $100 million.

Fibertech, a national fiber provider, has seen connecting cellphone towers grow from 5% of its business to 20% in the past three years, largely led by growing data use. I firmly believe this will be an ever increasing need as our consumption of data content on our mobile devices continues to increase.

Bottom line, the need for regional last mile fiber networks will increase over the next few years as our bandwidth demands continue to increase. Watch these regional players as they continue to be an active M&A target.

Joe Buck, N.C.E.

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