Digital Realty peers into new business with Telx purchase

Contact: Mark Fontecchio

Digital Realty Trust (DRT) buys Telx Group, moving into the interconnection business and adding a services element to the primarily REIT company. DRT is paying $1.9bn to acquire Telx from private equity firms ABRY Partners and Berkshire Partners, a price that represents a valuation increase of 5-6x over what Telx sold for to ABRY/Berkshire in 2011, according to 451 Research’s M&A KnowledgeBase.

This takes DRT into a more services-oriented business, shifting its strategy and putting it into direct competition with one of its key tenants, Equinix. The services aspect will reduce margins yet provide higher revenue per square foot. In that respect, it has some similarities to a deal in May, when REIT firm QTS Realty Trust paid $290m for Carpathia Hosting to move up the stack.

Telx has 20 facilities, mainly in top US markets, with a total of 1.3 million gross square feet of space. DRT has a similar global footprint to Equinix but is missing interconnection options outside of the US. We wonder if Interxion could also be a potential target, in the ‘you might as well go big or go home’ philosophy. Picking up Interxion – recently left at the altar when would-be acquirer TelecityGroup was bought by Equinix – would provide DRT interconnect assets in Europe as well.

There have been 16 interconnection/peering deals dating back to 2002, according to the KnowledgeBase. Telx – with its sales to GI Partners, ABRY/Berkshire and now DRT – has been by far the biggest target, accounting for three of those 16 transactions and almost 95% of the disclosed and estimated value.

Bank of America Merrill Lynch and Morgan Stanley advised Digital Reality, while DH Capital and Barclays Capital banked the sellers. For more real-time information on tech M&A, follow us on Twitter @451TechMnA.