A missed opportunity? Zayo’s bid for AboveNet…

March 20, 2012

This is a post about one that got away — sort of.

On January 18, we sent the list of our top 10 M&A picks for 2012 to footnotedPro subscribers (and only to subscribers), with a follow-up report that went out on February 24 to subscribers and trial subscribers. We see a lot of potential M&A signals in the filings, and the trick is deciding which are truly promising and which amount to noise — in other words, weeding out the false positives without also abandoning winners. We bring this up because one of our cast-offs just announced a deal yesterday.

That company is AboveNet (ABVT), which said yesterday that it would be bought by Zayo Group LLC for about $2.2 billion, or roughly a 13% premium over Friday’s close, and a 29% premium over its $66.25 close on the day we published our report. In the end, though, we aren’t too broken up about this one: We dropped AboveNet during our winnowing process not because we thought it was a poor takeover candidate, or because we didn’t see strong signals in the filings, but because we figured the odds of a deal were already baked into the price. The takeout premium and stock appreciation since the deal was announced suggests we were wrong — but we’d rather be wrong that way than make a lot of noise about a deal that was widely anticipated.

The mosaic that we built on AboveNet was intriguing. Activist investor Corvex Management (started by ex-Icahn lieutenant Keith Mesiter) acquired 5% of the company as of November 30, according to a Schedule 13D filing in early December, with the usual language about holding discussions with management and intending to do more of that sort of thing. The filing included a call/put combo that was in the money at the time we were poking around, but with what seemed like a relatively low dollar gain. At the same time, AboveNet was fiddling with its bylaws, and dotting the i’s and crossing the t’s on various arrangements with management. All this against the backdrop of good 2011 total-return performance, against both the S&P 500 and telecom services industry.

But there was a lot of chatter as well, and the AboveNet deal shouldn’t be too surprising to anyone paying attention to what was written about the company. In late May last year, DealReporter reported that AboveNet had hired JPMorgan “in order to explore a possible sale.” In December, Barron’s highlighted the Corvex take on AboveNet, writing in part:

“Ultimately, Corvex believes the company will be sold to a strategic or financial buyer.

“Earlier this year, it retained JPMorgan to run a small sales effort that included only financial buyers. That process ended with the company’s receiving bids slightly below Corvex’s $80-plus price target, plus preliminary interest from potential strategic acquirers.”

We published our 2012 deal report on January 18, without AboveNet on the list. Since that date, its stock had pretty much been tracking the Nasdaq (though it ticked up before the close on Friday, as stocks often seem to shortly before a deal; in this case, however, it’s a small enough uptick that it could just be random motion vs. the index).

On the one hand, we could have been crowing victoriously if we’d included AboveNet on our list, and there would have been some momentary glory in that. But at footnotedPro, we do our best to stick with signals that point investors to deals and other developments that haven’t yet gotten significant attention. By that measure, we’re comfortable with having left this one on the cutting-room floor.

Image source: Fisherman catches a salmon via Shutterstock.com

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At footnotedPro, we go beyond deal signals to scour corporate disclosures for early warning signs and potential problems, from bankruptcy to accounting gimmicks to government investigations. To see what you’re missing in the filings, or to inquire about a trial subscription to footnotedPro, please contact us.

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