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No. of Recommendations: 2
ZAYO reminds me of my cousin. Talented, but could not decide what she really wanted, switched majors and eventually finished the college with a double major and double minor in little over 5 years, and then went on to do MS, MBA and only to switch back and do a doctorate. We knew she is talented, smart and eventually will figure it out, but she kept everyone guessing and worrying, and raked up significant student debt, only to pay them off in few short years and have a very successful life.

What this has anything to do with Zayo? Zayo announced results on Feb 7th and along with results the company announced they are reviewing the strategic initiatives announced Nov, 2018. Just to recap, the plan is to split the company into two and the business that cannot fit neatly into REIT structure will be sold off and the surviving company will convert to REIT. Then the stock price dropped, and the company bought aggressively $400 m worth of stock at average price of $31 and to fund the buyback borrowed $250 m, and indicated the sales proceeds will be used to pay down the debt. And by December the stock price dropped to low 20's and buyout rumor's have emerged and by various reports the company was actively involved in negotiations.

In an industry event in late Jan, company acknowledged the rumors and announced a March 14th analyst day! And the company along with results announced they are reorganizing into 3 divisions/ segment, Network, co-location services and All Stream. It seems All Stream will be sold but the tax free spin-off is off the table now! The REIT timetable moved from 2020 to 2021/2022. Zayo has $1.9B NOL's and expects not to pay taxes until 2024/2025. While, the company mentioned that both network and zColo are REIT'able, but given their NOL's it is not clear whether they will convert to REIT anytime soon and if they choose to whether both network and zColo will be part of the same REIT. I think the immediate focus is Allstream and then probably they may spin-off, sell zColo and if these sales result in any gains, NOL can absorb them and the company may not have to pay any cash taxes. Resulting in a network business that is REIT'able with 50's EBITDA margin and generating significant cash flow.

The company has a better quarter on operation front but I guess right now no one is focused on that. The focus is on the Analyst day and Allstream financials, so that the analysts can calculate the sale price. The option actions on the near and front month is pretty strong. So the market is still expecting a deal.

I just hope Zayo follows my cousin and not me! The below exchange on the conference call is interesting and provide some clues about the "current" thinking of the management.



Operator

And our next questioner today will be Colby Synesael with Cowen & Company. Please go ahead.

Colby Synesael

Great. Thank you. You mentioned in your press release that you're evaluating multiple options that are core to the tenants that you talked about in November. When are you expecting to resolve or finalize that evaluation process. And I apologize for being so blunt, but are you not splitting the company now. I just want to be perfectly clear.

And then, I guess just back to Simon's question. I didn't hear the answer, but are you splitting or intending to split out the zColo business as a standalone company. Are you just haven't made that decision yet?

And then, also you're having an Analyst Day in March. I think it's in 14th. It seems like a lot of these things are still being figured out. Why haven't Analysts Day before potentially resolving all these things to month or two later be explaining to investors, I think they're different than what you just said your Analyst Day. Thanks.

Dan Caruso

How many questions was that? Well, good because most of them as the same answer which is -- yes, we're a public company. We always will be evaluating options. It's not going to have end date unless something were to happen. So as because you follow public companies, you're always in a position where the Board, the management team are looking to maximize shareholder value and in doing so especially for a property that is as valuable as a Zayo property there's interest as expressed in different ways from different parties at different times. So, it's incumbent on us to always be asking the question what's in the best interests of our shareholders from a value creation standpoint.

I think one of your questions, are we splitting into public companies. The core tenants of unleash are unchanged, okay. The focus is on the network business is our crown jewel. Okay. We're going to keep the layer 2, layer 3 the body of that and the services we provide part of the network or fiber business and form a network business around that. That's going to be where we apply more and more of our focus and attention. And as part of that providing more independence to zColo inclusive of the cloud business and making sure there's clear separation between the two.

We've said for quite some time that that Allstream particularly in the context being a REIT. Allstream is a business that is outside of what is the infrastructure theme of Zayo at some point you would expect to see that kind of no longer be part of Zayo, but when that happens it generates cash for us and as we said the advantages of being a REIT which are somewhat tied to federal tax payers, we are not federal tax payer for quite some time. So, we will resolve those, therefore, we'll resolve them in a more natural course.

So why are we having our Analyst Day? We've got our new investors over the last six months there's been confusion around Zayo and what we're doing. It's incumbent on us to provide more clarity about what our business is, why we have conviction and what we're doing, how we're approaching that. We want to give investors an opportunity to get to understand and beat the broader Zayo executive team and see what we're doing across multiple different areas of the business to unleash value for our shareholders.

John Hodulik

Just a couple of follow ups and clarifications first. I guess, so the plan is still to keep the rest of the company together, but eventually spin-off Allstream and if you can just confirm it? And then, is the delay in that sale what really drove the delay in the REIT status or the reconversion because obviously I don't think the tax -- your tax situation changed.

And then, I guess the big -- if you could just review one more time what's the driver of sort of the reset here. I mean obviously is it just as you guys went through the separation process and then I remember that sort of the narratives have change that you were deciding -- you're talking to your larger clients and some stuff was going into a network -- some stuff was going into enterprise. So, you just realized it was just too difficult and causing too much disruption. So you sort of unwound that whole thing. If you just review sort of what the drivers because I think my initial impression was that it was sort of probably driven by the sales process, but it doesn't seem like that that's the case it was more something the internal difficulties of separating the company into two. Thanks.

Dan Caruso

Sure. Sound like a few different things. Let me -- maybe address the REIT one first thing, Matt, you can do that.

Matt Steinfort

Yes. So from a REIT standpoint and this is related to the commentary that Dan will likely provide here. The fact that we were going to spin the company into enterprise go into a public company was going to consume NOLs, which would then require us to pay taxes on a much earlier basis, which expedited the urgency of converting to a REIT.

As we got into the analysis and discovered that more of the customers and the revenue was going to remain with the network business. It left us with a smaller Allstream or Enterprise Co. And the potential feasibility of a public spin started to come into doubt and therefore that the urgency around that reconversion wasn't there. You add to that the fact that we had a delay in getting any feedback on the PLR from the IRS and the physics as I said start to come in and it becomes less practical and given it's not as urgent that is really what contributed to the delay.



PS: I will be remiss if I don't credit Seeking Alpha for the transcripts. Please visit seekingalpha for the complete transcript.
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