Telarus Brass: Zayo Should Consider Integra/ELI's Channel Best Practices

By Adam Edwards and Patrick Oborn

**Editor’s Note: This is an excerpt from a column originally posted Thursday on LinkedIn.**

For the third time in 30 days, we see another monster acquisition.

Zayo [on Wednesday] announced it is acquiring Electric Lightwave and its entities, including Integra, for $1.4 billion. This comes on the heels of the $1.1B Windstream deal for EarthLink, and CenturyLink’s $25 billion acquisition of Level 3.  

Clearly, our industry is amid a wave of consolidation the likes of which we haven’t seen during our 15 years in this business. From where we sit, we see the number of cloud-applications providers growing and the number of network providers shrinking. We also see fiber assets receiving premium valuations, while older, TDM-based technology, and the cash flow generated from customers using them, on the decline. T1, analog PRI and DSL are quickly being dislodged by fiber and coax services nationwide.

A few short months ago Integra saw this writing on the wall and split into two companies: Electric Lightwave (ELI), which took with it all of the fiber assets, and Integra, which maintained the legacy CLEC base of non-fiber customers.{ad}

Whether Integra was proactively looking for a suitor to purchase ELI at that time is not clear. What is clear is that the “fiber first” ELI strategy raised its profile, making it look very attractive to other providers seeking to leverage ELI’s robust West Coast fiber footprint. What’s most interesting is that Zayo also acquired Integra (legacy), which – according to our sources – will be managed by its Canadian SME and voice businesses.

From a Numbers Perspective

[ELI in] July 2016 reported an annualized pro forma revenue of $429 million and earnings (EBITDA) of $134 million. Zayo, on the other hand, generates annualized pro forma revenue of $1.72 billion, and EBITDA of $152 million. Excluding taxes and interest expenses, ELI will almost double Zayo’s operating profits, which is why they receive such a generous multiple: nearly 10.6x EBITDA.

Although both ELI and Zayo focus on selling fiber to businesses, their size relative to the marketplace remains relatively small. According to Vertical Systems Group, [the] market research and strategic consulting firm, the companies combined annual revenues of $2.15 billion will move Zayo from 13th to approximately eighth on the U.S. Carrier Ethernet Services Leaderboard, behind the likes of AT&T, Level 3, Charter, Verizon, CenturyLink, Comcast, XO, and Cox.

From a Channel Perspective

Both companies have maintained active partner sales channels for quite some time. The ELI/Integra channel was one of the very first in the industry, dating back to the early 2000’s. For years it has produced anywhere from 30-50 percent of ELI’s total business sales revenue. Zayo launched its channel after its $2.2 billion acquisition of AboveNet in March 2012 and has been a …

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… consistent producer of new sales ever since. With the combination of the two channels, and because ELI is so channel-driven, we expect to see an increase in the overall direct-to-indirect percentage going forward, which should mean an increase in resources for Zayo channel partners.

With regards to size, we don’t have access to the internal channel sales numbers from either company. What we do have are our internal numbers that we’ll gladly share to illustrate the effect of this merger on master agents.

Combined book of business: $1,883,865.55/month

Combined 2016 YTD sales (as of Nov 1, 2016): $268,945.25

From our standpoint, having a single fiber provider represent $1.88 million in monthly billing with $300,000 in new sales in 2016 (est.) makes us more stable, more scalable and more streamlined, just as it does for Zayo-ELI.{ad}

From a culture standpoint, Zayo and ELI are very different. ELI has been in the channel for a very long time and derives a huge percentage of its total monthly fiber sales from the channel. Zayo has been in the channel game for around four years and is still in the process of trying to harness its potential. Like any merger, it is our hope the acquiring company will look beyond the network assets and take a hard look at the channel best practices of the company being acquired, and adopt the ones that make the consolidated carrier a better, easier place to do business.

The Future of the Zayo Channel

Although we don’t claim to have a crystal ball, we do have many years of experience with both the Zayo and ELI channels. The combined channel will surely be expected to bring more revenue than before, and to do that Zayo will need to work with master agents that have an expertise in fiber sales and understand both the Zayo and ELI value proposition. We’ve found that the best way to help drive fiber sales is to invest in developing software tools as well as demand-generation technology to help our downstream partners find and sell more Zayo-ELI fiber in on-net and near-net buildings.

We look forward to doubling-down on our investment in fiber tools partners need to become fiber-selling machines. … [And] we look forward to hosting more events across the country to educate our current and future partners on the benefits of selling Zayo fiber.

With any change comes opportunity, but you have to have the right relationships, tools, and information to fully take advantage.

Adam Edwards and Patrick Oborn are the co-founders of Telarus.