Zayo Group Holdings Inc. (NYSE:ZAYO) remains under pressure even on popping after it emerged it was an acquisition target for a group of investors led by Blackstone Group LP (NYSE:BX). The slump in share price comes on rating firm Moody’s placing the company on review for a potential downgrade
Zayo Group Price ANALYSIS
The posting of disappointing third quarter financial results also appears to have accelerated a sell-off, of the stock in recent weeks. The broader stock market turning bearish in the wake of trade tension between the U.S, and China, has all but continued to exacerbate the sell-off.
Zayo Group Holdings has lost more than 30% in market value in recent weeks having come under immense short selling pressure. A breach of a critical support level at $33 a share level meant that the stock had turned bearish.
While the stock has since bounced back from the $22 a share handle, it remains susceptible to further declines given the underlying steep downtrend. After the recent spike higher, the stock faces immediate resistance at the $30 a share level on any bounce back.
For the stock to have any chance of rallying back to the top it, must first rally and stabilize above the $33 a share level. Zayo Group Holdings faces the risk of recording a new all-time low on dropping and closing below the $22 a share level.
Why is Zayo Group Holdings under Pressure?
Zayo Group Holdings has come under pressure on ratings firm Moody’s raising the red flag about the company’s long-term plans. The company is planning to split into two by year-end of 2019.
The split will result in two companies; Zayo Infra Co made up of Zayo’s current infrastructure business and Enterprise Co comprising of mainly enterprises services. Immediate reports also indicate that Zayo Infra could end up being a real estate investment trust (REIT) by 2020.
While the split will reduce some of Zayo Group Holdings, complexity, Moody’s believe it could have a negative impact.
“This structural simplification could negatively impact competitive positioning, sustainable growth opportunities and financial policy at Zayo Infra Co, the successor company to Zayo and where Zayo’s currently existing debt will remain outstanding, resulting in potential downward ratings pressure,” Moody’s in a statement.
Concerned by the negative implication, the ratings firm has indicated it could downgrade the company’s B2 corporate family rating as well as Ba2 senior secured bank credit. Ratings downgrade is not the only headache afflicting the stock’s sentiments in the market.
Earnings Miss
Revenue declining by 0.3% year-over-year to $641.1 million in the recent quarter has also not gone well with investors. The drop resulted in a 5% decline in net income that came in at $22.1 million. Zayo’s bookings were also down in the quarter by 0.3 million to $7.3 million.
Zayo decline did receive a reprieve after emerged; the company is an acquisition target. A group of investors including funds led by Blackstone Group LP and Stonepeak Partners is spearheading the takeover push.
Bottom Line
Disappointing earnings results as well as concerns over a potential downgrade raises serious concerns about Zayo Holdings long-term prospects. The fact that the company does not provide a specific forward guidance all but makes it impossible to gauge its growth prospects.
The stock looks set to remain under pressure on growing concerns about the underlying fundamentals. Failure of the company to reach an agreement with the group of investors eyeing a takeover could leave the stock in a precarious position especially after the recent slump.