Zayo Remains A 'Work In Progress,' Its Ability To Execute Still A Question Mark

Deutsche Bank said in a note that execution at Zayo Group Holdings Inc ZAYO is still a work in progress. This balances out the firm's positive stance on strategic positioning and optionality.

Citing execution concerns and lack of clarity on meaningful near-term inflections, the firm initiated coverage of Zayo Group at Hold and a $36 price target.

Analyst Matthew Niknam sees the company's uniqueness and scarcity value as a scaled, independent owner of high-quality of fiber assets as a major positive.

"In contrast to our cautious stance on Wireless/Wireline operators, we remain bullish on Communication Infrastructure providers ZAYO who are poised to benefit from key themes including robust data growth/5G," the analyst said.

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The analyst also said he sees multiple paths to value creation, namely an M&A scenario, when the company could be bought out for $50 per share, REIT conversion or shareholder returns and accelerating free cash flow generation. Additionally, the analyst sees accelerating free cash flow generation.

On the other hand, Deutsche Bank sees risk from company-specific factors such as newer leadership/quota bearing reps and deal integration. This, according to the firm, would keep growth subdued near term.

The firm also foresees industry challenges such as customer consolidation, enterprise revenue headwinds and DIY fiber builds from carrier customers. Also, the firm said Zayo's elevated cost of capital and higher leverage are put-offs.