Uniti Group is acquiring Southeast-based fiber provider Southern Light for about $700 million in cash and equity, a deal that will deepen the company’s reach into new wholesale and enterprise service opportunities.
The company will fund the Southern Light acquisition with cash on hand, proceeds from potential debt or equity financing and borrowing under its revolving credit facility. Permanent financing is expected to include approximately $250 million in debt and about $450 million in equity with proceeds to pay the cash consideration for Southern Light.
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Southern Light’s revenues consist of a diversified mix of customers: 50% come from Tier 1 wireless operators, 30% come from wholesale and enterprises and 14% are from government and E-Rate customers.
Kenny Gunderman, CEO of Uniti Group, told investors that revenue from long-term contract customers from Southern Light and its previously announced acquisition of Hunt will rise.
“Our revenue under contract for these two acquisitions will almost double to $1.2 billion with nearly 80% coming from investment-grade customers and our mix of dark fiber in the backlog continues to grow,” Gunderman said.
Southern Light has established itself as a growing provider of data transport services along the Gulf Coast region serving 12 attractive Tier II and Tier III markets across Florida, Alabama, Louisiana, Georgia, and Mississippi. The carrier’s dense regional fiber network comprises nearly 540,000 fiber strand miles, 5,700 fiber route miles, and over 4,500 on-net locations.
Jennifer Fritzsche, senior analyst for telecommunications services at Wells Fargo, said in a research note that the Southern Light acquisition is going to help grow its fiber services visibility.
“We view this transaction positively, as UNIT continues to grow fiber scale and diversify its revenue mix from Windstream,” Fritzsche said. “Pro forma UNIT's Hunt and Southern Light acquisitions, non-Windstream revenue mix will be 30% of total revenue.”
Strengthening dark fiber, small cells
Uniti’s Southern Light deal is also significant in that it further its southern market fiber reach, particularly for new dark fiber and small cell opportunities.
Dark fiber and small cells make up 44% of Southern Light’s current revenue mix. Southern Light’s infrastructure solutions include fiber-to-the-tower backhaul, dark fiber, and small cells, and it is currently deploying nearly 1,000 route miles of dark fiber for a major wireless carrier.
Prior to the acquisition, Southern Light won a 20-year contract to install 1,650 route miles and 14,000 fiber miles to connect 446 tower sites in Louisiana, Mississippi, Alabama and Florida. As part of that contract, Southern Light previously said it would be building approximately 790 fiber miles over the next four years in order to fulfill the recent contract.
Gunderman said that the Southern Light acquisition will give it complementary installation and maintenance capabilities as it pursues new small cell opportunities.
“Southern Light has an effective in-house construction capability, which we expect to play a critical role in executing in our growing backlog of small cell deployments at Uniti Fiber,” Gunderman said.
Gunderman added that the Southern Light network also will deepen Uniti’s presence in non-NFL markets.
“The network is wholly owned and is in highly attractive Tier 2 and Tier 3 markets,” Gunderman said. “We believe that the Tier 2 and Tier 3 markets are generally less competitive, but still have attractive growth potential.”
Uniti’s acquisition of Southern Light will also enhance bond in the education and public sector space with a larger collection of E-Rate and Department of Defense (DoD) customers.
“While the contracts for E-rate and government customers are shorter in duration, the nature of the customers and the E-Rate program similar to Hunt Telecom,” said Mark Wallace, CFO of Uniti Group.
Additionally, Southern Light will give Uniti a deeper reach into the military sector. The service provider has a large presence with the naval bases in the Gulf Coast region, for example.
Gunderman said Uniti can leverage Southern Light’s experience to target other military posts throughout the rest of its existing region.
“On the Gulf Coast region there’s a substantial Army and Navy presence with naval and military bases, which Southern Light is serving,” Gunderman said. “If you look across our broader footprint there are a substantial number of bases which we’re starting to penetrate on our own and Southern Light will accelerate that part of our business.”
Deal complements Hunt acquisition
When combined with its recent acquisition of Hunt Telecommunications, Uniti expects to increase non-Windstream revenue to approximately 30% of total revenues.
Uniti said that Southern Light’s organization and operations are complementary to Hunt and both will be integrated into Uniti Fiber. The service provider expects to achieve annual run-rate cost savings related to its acquisition of Southern Light of $10 million within 24 months after closing, as well as additional capital expenditure and revenue synergies. These cost savings are incremental to the previously announced savings of $2.5 million associated with the acquisition of Hunt.
“The Southern Light network interconnects extremely well with our existing Uniti Fiber footprint and particularly well with our recently announced acquisition of Hunt Telecom,” Gunderman said. “We believe that true scale and leveragability of fiber networks are enhanced with geographic connectivity and metro density.”
Upon completing the Southern Light and Hunt deals, Uniti Fiber will double its operational network to encompass over 1 million fiber strand miles and increase Uniti’s aggregate strand miles to over 4.8 million.
Taking into consideration the addition of Southern Light and Hunt, Uniti Fiber’s revenues under contract will exceed $1.2 billion. Southern Light enters 2017 with revenues under contract exceeding $435 million and an average remaining contract life of over 10 years.