Analysis & Comment

Starboard builds stake in Zayo, presses for sale

(Reuters) – Activist hedge fund Starboard Value LP has amassed a 4 percent stake in Zayo Group Holdings Inc and is asking the U.S. communications infrastructure provider to consider a sale, according to a letter sent by Starboard to Zayo on Thursday.

Starboard’s letter comes after Zayo on Wednesday canceled its March 14 analyst day and said it was evaluating all its options, sending its shares up 13 percent.

Zayo has lost a quarter of its market value in the last 12 months amid anemic revenue growth and heavy capital expenditure.

Starboard, which has been in contact with Zayo over the past several months, believes a sale of the company may be the best option for shareholders, and said the process must be conducted in a “purely objective way,” according to the letter, a copy of which has been reviewed by Reuters.

Any potential conflict of interest, including the roles of members of management and the board in a potential deal, should not be allowed to affect the deliberations, Starboard wrote.

Zayo, which has a market capitalization of $6.5 billion and whose debt at the end of December totaled $5.9 billion, did not immediately respond to a request for comment.

Based in Boulder, Colorado, Zayo operates a 130,000-mile fiber network in the United States and Europe that helps connects data centers and also serves wireless and landline phone companies. It stands to benefit from rising demand for bandwidth, driven by cloud computing and streaming.

However, Starboard in its letter blamed a string of poorly integrated acquisitions, senior leadership turnover and lack of spending discipline for the company’s revenue growth decreasing from 7.8 percent in September 2015 to 3.6 percent at the end of 2018.

Were Zayo to decide to remain independent, it would need to streamline its operations, adopt a more disciplined approach to capital allocation, and improve oversight of the company, the New York-based fund wrote.

Starboard, which is run by its co-founder Jeffrey Smith, is not the first hedge fund to press Zayo to sell itself. Sachem Head Capital Management LP has also written to the company asking for it to explore such a move, Reuters reported last month.

Zayo has rejected acquisition offers in the last few months, including from a private equity consortium comprising Blackstone Group LP, Stonepeak Infrastructure Partners LP, KKR & Co Inc, I Squared Capital, Charlesbank Capital Partners and GTCR Ltd, Reuters has reported.

Zayo announced last November it would break itself up into two companies, but then said in February it no longer believed it was in the company’s best interest to pursue a public spin-off as part of its strategic review. Plans it disclosed in November to convert to a real estate investment trust as early as 2020 were also pushed back in February.

Starboard in its letter called these sudden changes in strategy “troubling” and “an indication of a broader lack of strategic direction and oversight.”

Starboard is one of the most prominent and prolific activist hedge funds. It is currently seeking to break up drug maker Bristol-Myers Squibb Co’s $74 billion deal to buy Celgene Corp; it is pushing for changes at discount retailer Dollar Tree Inc; and has put forward nominees to challenge the board of healthcare plan and pharmacy benefits manager Magellan Health Inc.

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