Telco and colo: a marriage of necessity

Contact: Ben Kolada

Telcos and colocation providers are increasingly coming together in a marriage of necessity. Telcos’ own traditional wireline services are in a state of decline from which they will not recover. Meanwhile, colocation providers are growing rapidly, but need a footprint the size of their larger telco peers to continue such expansion. As a result, cross-sector M&A is on the rise, but we wonder if the marriages may someday end in separation.

Case in point: GTS Central Europe. The Warsaw-based communications provider recently began investing in colocation services to offset losses in its own core business. Although 2010 year-end numbers are not yet available, the company’s revenue is expected to take a slight dip, from €384.5m ($551m) recorded in 2009 to about €380m ($500m) for year-end 2010. To offset losses, GTS began looking for growth channels, and subsequently threw its weight behind datacenter services. Last year, the company announced several datacenter completions and expansions, as well as two datacenter-related acquisitions. In June, the company picked up Interware, which operates two facilities in Budapest, and earlier this week it announced that it is acquiring Prague-based single-site colocation provider SITEL Data Center. (We’ll have a full report on the SITEL purchase in tonight’s Daily 451.)

However, following the SITEL buy, GTS is now spinning off its datacenter business into a new entity named CE Colo. Financial terms of the spinoff haven’t been disclosed, but we would expect GTS to maintain some interest in CE Colo, perhaps even a controlling stake. No other telecom operators have yet followed this strategy, and it’s still too early to tell if any ever will – most of the landmark telco-colo transactions we’ve seen so far were announced just last year. But if the revenues in both sectors continue their current trajectories, spinoffs like CE Colo may someday become the norm.