Digital’s New Era
Over the last 24 months, Digital Realty has broken the record for the largest data centre M&A deal twice. The company has, in the past ten years, invested nearly $23BN in such transactions throughout its world dominance quest, double the closest rival Equinix. Is it enough? João Marques Lima searches for the answer.
Digital Realty’s first billion-dollar acquisition took place in 2012 when the company invested $1.1 billion in buying British colocation provider Sentrum. The deal saw the American REIT purchase three buildings amounting to approximately 761,000 sqft in the London region.
Since then, Digital Realty has heavily expanded its capital expenditure (CAPEX) in several other large merger and acquisition (M&A) deals including Telx in 2015 for $1.98 billion, eight Equinix facilities in 2016 for $874 million, DuPont Fabros Technology (DFT) in 2017 for $7.4 billion, Ascenty in 2018 for $1.8bn, and more recently, Interxion for $8.4 billion.
With the DFT and Interxion transactions - currently the two highest cash amounts paid for a given business in the data centre world, Digital Realty has shown that it is in the game to win big and build one of the world’s most valuable Real Estate Investment Trust (REIT) which is currently valued at $25.24 billion, a figure that is nearly half of the one rival Equinix boasts, which has an valuation of $48.41 billion.
“When you think about Digital, think of this as a series of long term contracts that are stacked on top of each other with typically 3% annual escalators, where the underlying collateral or security is critical infrastructure for cloud source providers and enterprise companies and government, to a lesser extent,” Digital Realty’s CEO Bill Stein has previously told Data Economy.
“What you’re really buying is this stream of recurring cash flow, as an investor.”
The transaction with Interxion shows the ‘gold rush’ moment the European data centre landscape is witnessing, especially propelled by American operators and large investment funds.
The EMEA region is projected to reach $17.21 billion in data centre market value by 2024, growing at a compound annual growth rate of 11.1%, according to Structure Research.
The double-digit grow proves a strong demand for colocation services, be it retail or wholesale.
As part of the merger of the two transatlantic giants, Interxion’s CEO David Ruberg, says: “Stakeholders will have the opportunity to continue to reap the benefits of the value that we have created via the communities of interest approach in our carrier and cloud-neutral European data centre portfolio.”
When the acquisition of Interxion was announced in late October 2019, the market expressed mixed feelings, with some arguing that the deal was
“inexpensive” for Digital Realty but would help the company build its footprint in Europe and others – especially investors – who voiced some dissatisfaction with the deal for its inexpensiveness.
One of those voices is Berenberg Bank’s analyst Nate Crossett who says that
“DLR is getting Interxion inexpensively”.
With the price tag at $93.48 per share, Crossett and other analyst houses have argued the share price should have fetched around $100, with some pointing at $113 as the anticipated selling tag for the business. This would have made the transaction reach $10.15 billion, an extra $1.75 billion, which could have left shareholders more at ease with the mega-merger.
However, the market has also not dismissed the competitor impact that such transaction could have across Europe, where Interxion operates 53 carrier and cloud-neutral facilities in 11 European countries and 13 metro areas including Frankfurt, Amsterdam, Paris, London, and Stockholm.
“The prospect of combining these two powerhouses is really exciting for the European data centre market,” says Andrew Jay, executive director of data centre solutions at CBRE.
“Interxion is the last pan European retail platform and so I expect it was hard-fought over by Digital Realty.
“In a global context, Interxion should be complimentary to Digital Realty’s 2015 acquisition of Telx and the more recent Telecity divestment assets purchase, both of which bolstered their connectivity offering.”
Jay adds that the combined group will be vying for the top position in the FLAP (Frankfurt, London, Amsterdam and Paris) markets with over 300MW’s of IT capacity which is around a fifth of the market.
“They’ll be able to expand the Interxion “communities of interest” across a much wider footprint which should benefit their customers and accelerate the combined group’s growth. These unique communities are gold dust having taken 20 years to develop.”
By leveraging Interxion’s diverse footprint, they’ll be well placed to satisfy the hyperscale requirements which are expanding out from the traditional FLAP markets.
“If they get the integration right they’ll create the best of both, retail and wholesale, worlds,” Jay adds.
Whenever a big transaction takes place, market watchers are not the only ones voicing their opinion. Rivals do so as well, and Equinix’s CEO Charles Meyers quickly reacted to Digital Realty’s take on Interxion.
“It’s not too difficult to see why each of those parties might be interested in this combination,” Meyers said in the company’s Q3 results call transcript held in October.
“Interxion has always been a vigorous competitor of ours in Europe, and I’m sure they will remain as such. As for Digital Realty, it’s my experience that the overlap between our business and theirs is actually fairly small. That will probably not be the case with our xScale joint venture, where we’re likely to be more consistently head to head. But in our core retail business, we only see them sort of selectively as a competitor.”
Meyers continued to tell those on the line during the call that Digital Realty’s entire retail business outside of Europe, “in other words, what we would be appending from a retail perspective on to the Interxion business”, is about one-tenth the size of Equinix overall.
“The combination represents the bringing together of two very different businesses. A strong European retailer and a strong global wholesaler. There is probably merit in the deal and an industrial logic to it. It’s a bit of a stretch to say that the combination really meaningfully closes a gap in terms of trying to replicate the scope, scale and value of Platform Equinix.
“The challenges in combining those businesses, just mechanically, let alone operationally, financially and culturally, will certainly be non-trivial. Even if and when that’s done successfully, what comes out the other end is a company we will feel pretty comfortable competing against, certainly in Europe, which we’ve been doing, obviously, for years, and in particular on a global basis.”
When it comes to Equinix’s own acquisition strategy, Meyers said the company is going to be disciplined, and that he is “not going to chase valuations if we think they don’t make sense for the business”.
Is it enough?
The answer to the question ‘is it enough?’ is undoubtedly a no.
Not because of the deal in itself, but simply because of the enormous market demand still out there for more colocation services and cloud access. The European data centre ecosphere is also in constant change, with dozens of facilities having moved hands over the past months, rejigging monopolies and colocation powerhouses across the continent.
This is a trend set to continue, with several market rumours suggesting at least three large-sized deals of more than $2 billion currently on the table that could once more change the game. Today, it is common to hear that “everyone is on sale” and that seems to be the case in Europe, where there is a scarcity of businesses for acquisition despite the large investment pools investors have at their disposal.
As Equinix’s CEO Meyers, says, the Digital Realty and Interxion merger doesn’t close the gap in the market, which still has enough to offer not only to the world’s two largest data centre operators but all the other players.