More Data Center M&A Likely. But Who Will Be the Buyers?

Nov. 18, 2015
With an unusual number of data center assets up for sale, investors and analysts say the likely buyers will be strategic acquirers seeking expansion, rather than private equity firms.

HALF MOON BAY, Calif.  – The data center deals keep coming, and there’s plenty more in the pipeline, with an unusual number of data center assets up for sale. Investors and analysts say the likely buyers will be data center providers seeking strategic acquisitions to expand their business, rather than private equity firms.

The buyout boom continued with Monday’s announcement that Denver-based ViaWest is acquiring iNetU in a deal that will extend its data center footprint to the East Coast and Europe. It’s the latest in a series of M&A transactions in 2015, including:

  • Digital Realty’s $1.9 billion acquisition of Telx
  • Equinix buying TelecityGroup for about $3.6 billion
  • CyrusOne’s deal to buy Cervalis for $400 million
  • The acquisition of Latisys by Zayo Group for $575 million
  • TierPoint’s deal to buy Windsteam’s data center assets for $575 million
  • Cologix buying New Jersey colo specialist NetAccess

“It has been a pretty active year, and we expect that activity to continue,” said John Bejjani, an analyst at Green Street Advisors, who was among the speakers discussing the industry consolidation at the IMN Forum on Financing & Investing in Data Centers and Cloud Infrastructure, held last week at the Ritz Carlton Half Moon Bay.

With so much M&A activity already this year, it might seem unlikely that the deals could continue at this pace. But there are plenty of assets that may be for sale, including one data center REIT (real estate investment trust), the data center portfolios of two large telecom providers, properties being divested by two other REITs, and any number of corporate data centers.

Who Will Be the Buyers?

Why are so many data centers for sale? Is this a sign of the Apocalypse? Investors say it’s actually a reflection of the strong valuation of data center businesses, reflected in recent deals and trading gains for publicly-held companies in the sector. That’s led some players to consider an exit, and others to seize an opportunity to sell assets for top dollar.

The flurry of selling activity by telecoms has generated some concerns, but is primarily tied to trends within the telecom industry, say analysts. For more on this see our deeper dive into this topic: Data Center Sales Reflect Telco Troubles, Not Colo Trends.

We know who the sellers are. But who will be the buyers? Panelists at IMN point to data center REITs and service providers seeking to add new capabilities or expand their geographic footprint. Strategic buyers might include CoreSite, CyrusOne, QTS Realty, Digital Realty, DuPont Fabros and Equinix  – although it’s worth noting that many of these firms are still busy digesting recent acquistions.

“We’re seeing the vast majority of deals done by strategic buyers, rather than private equity,” said Tomer Yosef-Or, principal in ABRY Partners, one of the most active private equity firms in the data center sector. “I suspect that’s going to continue for the next few years.”

Data Center Sellers and The Assets in Play

Here’s a look at the data center assets that are being evaluated for sale or are rumored to be in play:

  • CenturyLink is exploring alternatives to owning its data center porftolio, which includes 60 data centers with more than 180 MW of power and 2.6 million square feet of space. Many of the facilities are leased from service providers, with landlords including Digital Realty, IO and Switch.
  • Carter Validus Mission Critical REIT recently hired Goldman Sachs to explore strategic alternatives, Carter Validus owns 20 data centers and a large portfolio of healthcare properties.
  • Digital Realty is seeking to sell seven properties, including two data center buildings in St. Louis and two in northern Virginia. It has sold one and is in contract talks on the other six, which could serve as a platform play for a single acquirer.
  • Verizon is reportedly interested in selling the data center assets of Terremark, which it acquired in 2011. Terremark operates two major campuses: the NAP of the Americas in Miami and the NAP of the Capital Region in Culpeper, Virginia. It also has data centers in Santa Clara, Dallas, Amsterdam and Sao Paulo, Brazil.
  • The EU last week told Equinix that it would approve its deal to buy TelecityGroup if Equinix divests eight facilities, including TelecityGroup data centers in London, Amsterdam and Frankfurt and an Equinix site in the greater London market. The divested properties could offer a ready-made multi-city footprint for companies seeking to enter the European market.

Private Equity Wary of Valuations

Recent deals have established strong valuations for data center assets. That’s not an ideal scenario for private equity investors, who are typically looking for assets that have significant upside, and can achieve strong returns through expansion and investment. Private equity investors have been frequent acquirers of data center assets, given the capital-intensive nature of building new data center capacity. PE firms often acquire companies that have proven their model in several markets, but back the deeper pockets needed to expand aggressively into new markets.

“We’re always focused on utilization and contiguous expansion, and what we’re creating that we can sell back to the market in five years,” said Yosef-Or. “You have a lot of  strategics looking at assets coming to market. They’re looking for talent, synergies, or whether these assets fill a geographic need.”

“Private equity looks for the opportunity to add value,” said Rob Stephenson, principal at 19 Technologies and a veteran of Xand and Access Northeast. “Strategic buyers may value a deal very differently.”

“Returns are being driven lower and lower for guys like us,” said Zaid Alsikafi, Managing Director at private equity firm Madison Dearborn Partners. “It’s about choosing our spots.”

One of those spots might be the “edge” markets emerging as data destinations for caching of video content and Big Data.

“There are some interesting opportunities that could be seen as edge-driven opportunities,” said Alsikafi. “For sure, we’re looking at opportunities at the edge, particularly with the public companies so focused on the core markets.”

Corporate Data Centers in Play

A number of panels at IMN addressed the potential for sales of corporate data center properties, noting that many companies are deciding this is either not a core competency or not a good use of capital.

“The average CEO doesn’t want to own a data center anymore,” said Mark Thiele, the EVP of Ecosystem Development & Evangelism at Switch, which operates the SUPERNAPs in Las Vegas.

Anthony Bolner, the CEO of Stream Data Centers, agreed. “Enterprise CIOs and CEOs really don’t want data centers on their campuses or in their facilities,” said Bolner.

This suggests a growing potential market for sale/leaseback deals, in which a data center owner sells their building, while agreeing to continue to lease space from the new owner. The transaction generates cash for the former owner (now the tenant), and provides the new owner with steady rent from the lease and a tenant with a strong credit rating.

“It seems like the corporate data center world is for sale,” said David Mace, managing director at GI Partners. “There’s lots of rumors out there now about large portfolios of assets that may be for sale. There’s plentiful financing out there at very attractive rates.”[clickToTweet tweet=”David Mace, GI Partners: It seems like the corporate data center world is for sale.” quote=”David Mace, GI Partners: It seems like the corporate data center world is for sale.”]

Capacity, Risk and the Future

Corporations may not want to own and operate data centers, but they will always need mission-critical space for their servers, and they’ll need more of it over time. In addition to their existing IT operations, there’s the cloud and Big Data and the Internet of Things to consider. That’s why data center assets have found ready buyers at attractive valuations. The future is coming, and data centers will be the business engines for the continuing Internet revolution.

“There’s a lot of excitement and future prospects for data centers based on what people are paying for assets,” said Mace. “We think there’s good reason for that. In today’s environment, we as a community of data center professionals are much more rational about planning out growth for capacity. The risks of overcapacity are much lower today.”

That’s boosted the confidence of investors in the publicly-held data center REITs, according to Green Street’s Bejjani.

“Real estate Investors have warmed up to data centers,” he said. “You see most data center REITs trading at par or at a premium to the value of their underlying real estate assets. The public markets are giving these players the green light to raise money and go consolidate the sector. I don’t know if we’ll see that, but we’ll definitely see more acquisitions.”

About the Author

Rich Miller

I write about the places where the Internet lives, telling the story of data centers and the people who build them. I founded Data Center Knowledge, the data center industry's leading news site. Now I'm exploring the future of cloud computing at Data Center Frontier.

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