In the latest edition of Behind the Buyouts, Searchlight Capital Partners LP partner Andrew Frey took a deep dive into the firm’s fiber playbook and the thesis behind the investment in, and sale of, Ziply Fiber.

Searchlight’s investment in Ziply began as a $1.35 billion carveout of fiber assets in the Pacific Northwest from Frontier Communications Parent Inc. (FYBR) that closed in 2020 and resulted in a C$7 billion ($5 billion) sale to Canadian telecom BCE Inc. (BCE) in November. The sale of Ziply notched high-teens multiples and reflects important tenets of Searchlight’s strategy.

“We would use the bones of the phone companies, upgrade them and transform them into fiber businesses,” Frey said.

The firm prefers investing in phone companies rather than greenfield fiber startups, he said, because of favorable unit economics, speed of deployments and dynamics in market competition.

In recent years, Searchlight and other sponsors have faced increased competition for fiber assets from infrastructure investors.

“There was a period of time where infrastructure firms were coming in and pricing assets at levels that we didn’t feel made sense,” Frey said. “I think many of those platforms will struggle and that, candidly, could create future opportunity for us as we see some firms look to exit.”

Meanwhile, many fiber operators have opted for structured capital raises as interest rates rose and crunched valuations, complicating common equity negotiations.

“Just as we’ve seen these structured deals as a necessity to get more capital into these businesses without showing true valuation marks, I think you’ll see consolidation among smaller size platforms,” he said.

“I’ll mark my business up really high. You mark your business up really high,” he said of a potential rationale for deals. “We put them together so we can sort of hide the valuation discussion for now, and in the meantime, try and gain scale and efficiencies and profitability.”

The conversation also dug into recent wholesale network deals, the economics of fiber for wireless carriers and the potential for “one or two more opportunities” for Searchlight to turn around a phone company.

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