Bjarni Thorvardarson, CEO of Hibernia Networks, kicked off the second panel discussion today at Metro Connect 2013. The topic of the panel was Financial and Strategy Analysis of M&A and Consolidation in 2013 and Predictions for 2013. Bjarni was joined on the panel by Gillis Cashman of M/C Partners, George Morgan of Ridgemont Equity Partners, and Steven Soraparu of Waller Capital Partners. The moderator of the panel was James Henry of Bank Street Group.
First topic of the conversation: the effect of the M&A investments of late. About 45 companies in the past year have consolidated. James asked Bjarni how does this affect his business. Bjarni said it made their lives a little easier due to dealing with less vendors and the ability to consolidate Hibernia's spend, which is good from an operational perspective. Bjarni mentioned that it will be interesting to see when fiber renewals come up in about 2-3 years time. Until then, the Zayo and Lightower's of the world will be busy with integration of their networks. Everyone is competing in this space and pricing their products on the incremental capex of services they are providing, and it's the hardware vendors driving this price. So it will be interesting to see what happens in a few years down the line.
James then asked Gillis, a key investor in Zayo Group over the years, if consolidation has helped the pricing? Gillis said the biggest difference he sees is the health of the industry over the past few years. Considering the demand sets today, a lot of the return is at the edge of the networks. There are markets where we are seeing a lot of competition, like the northeast with Lightower and Sidera, which will drive some rationalization.
George continued that when he is bidding on projects, they are usually bidding against 2 or 3 others. The consolidation currently will occupy some of the bigger players to build their investments, and this might allow for smaller companies time to grow.
Steven added that everyday it's a battle to get those contracts, even though there are fewer pieces on the chess board. "The fiber business is in a rennaisance, for the past 6-7 years, and building tremendous support from several segments of the value chain." There is more experience by management in running their businesses. There are a lot of options, they can get capital from banks or sponsors, or if they are interested in getting equity, by companies beyond Zayo and Lightower, that would be interested in having a conversation.
James then asked Bjarni, as your company spans the world now, how do you consider the market valuation? Bjarni responded that the consolidation among the bigger guys are creating more opportunities for Hibernia. Hibernia made its second acquisition last year and are looking at additional opportunities on the horizon. Potential targets depend on current corporate locations. Hibernia has network in the UK for example, and there are opportunities in the UK and Europe that would be complementary. The company has also been actively rolling out Project Express, a new transatlantic fiber build between New York and London, so additional tie-ins to UK and Europe would make sense.
Gillis further discussed factors for valuation, such as M/C Partners look for the potential of on-net businesses that are available to the fiber network. Obviously companies' stability drive the valuation, and the composition of the revenue model. SONET and Ethernet revenues in tier 2 markets are a big consideration. There is also interest in network footprints where trying to replicate routes would be cost prohibitive. So revenue composition, asset density and inability to replicate footprints would be key for M/C Partners.
George continued, "if you are one of 4 or 5 major players, like Zayo, Lightower, Sidera, that's one side of the spectrum. You can also be one of the top 2 players in areas like Omaha, that's another end of the spectrum." There are literally hundreds of thousands of projects out there that need to be built, where end points are still copper. There's still plenty of opportunity, though you need to be a leading player in a tier 2 or 3 market to have enough scale capability, but as long as you maintain enough focus to achieve density over time, then the business model works.
Steven said historic and future growth projections are the most important factors driving M&A deals for Waller Capital Partners, as well as the growth of network and density potential as discussed. But the 'end all, be all' is how fast are the companies growing. There has been instances where the company has attractive assets that have not been optimized, but in general it's about growth.
In particular, Steven cited the Lightower and Sidera deal, valued at $2 billion dollars. Lightower was growing 20% from an EBITDA perspective. Sidera a little slower. How did Berkshire evaluate the business? Steven stated, "we believe it had to do with growth, not market dynamics but company dynamics."
Continue to stay tuned to TNN as we to report live from the Metro Connect floor.
