CyrusOne’s steady rise

Contact: Tejas Venkatesh, Ben Kolada

CyrusOne, the colocation bull that has now changed hands three times since 2007, debuted on the Nasdaq today with a valuation topping $1bn. The fast-growing company was spun off of Cincinnati Bell but is still majority owned (72%) by the regional telco. Shares popped during early trading, continuing the company’s history of creating considerable wealth for each of its owners.

The datacenter company, which is structured as a real estate investment trust, sold 16.5 million shares at $19 per share, higher than its previously guided $16-18 range. The IPO raised a total of $313.5m, though underwriters have an option to sell an additional 2.5 million shares. Shares jumped approximately 10% when they hit the Nasdaq and held the gains through midday trading. CyrusOne currently sports a market cap of about $1.3bn.

CyrusOne operates 24 facilities, primarily in the Ohio and Texas markets. The company offers colocation services aimed at enterprise-class customers requiring highly available facilities, engineered for dense power and reliability. Morgan Stanley and Bank of America Merrill Lynch were joint bookrunners for its IPO.

This is the third time shares of CyrusOne have traded hands since 2007. And in each transaction, its value has steadily climbed, creating considerable wealth for each of its owners.

CyrusOne’s rising valuation

Date Liquidity event Valuation
January 18, 2013 IPO $1.3bn
May 12, 2010 Sale to Cincinnati Bell $525m
July 11, 2007 Sale to ABRY Partners $130m

Source: The 451 M&A KnowledgeBase

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Telcos playing a new hosting game

Contact: Ben Kolada

Datacenter operator Digital Realty Trust on Wednesday announced that it paid $80m for a three-property portfolio of datacenters from French telco Bouygues Telecom. The deal could signal yet another robust year in Internet infrastructure M&A, but also shows that telcos are playing different strategic cards in the ongoing hosting game.

Last year set a record in Internet infrastructure M&A deal volume with 110 acquisitions announced, according to The 451 M&A KnowledgeBase. The record is particularly notable as it comes at a time when telcos are weighing alternative options to acquiring hosting properties. With the exception of NTT Communications, which announced three hosting acquisitions last year, telcos have largely been out of the M&A arena.

In fact, as evidenced by Bouygues’ divestiture, telcos are now considering strategies other than buying or owning high-growth hosting businesses. For example, the Digital Realty-Bouygues deal is structured as a sale-leaseback transaction, in which datacenter specialist Digital Realty will own the facilities but Bouygues will lease and operate them. Other telcos, such as Cincinnati Bell, have also decided to pass their hosting facilities on to vendors more versed in the business. Cincinnati Bell is spinning off its CyrusOne hosting unit into a publicly traded entity. CyrusOne will debut on the Nasdaq tomorrow, planning to sell 16.5 million shares $16-18 each.

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US telcos feeling the squeeze

Contact: Ben Kolada

Amid double-digit revenue growth in the cloud infrastructure market, US telcos are increasingly buying their way into this industry in an effort to stem losses in their traditional wireline businesses. However, just as the hosting and colocation sectors are growing rapidly, so too are the major players being acquired. So far this year, we’ve already seen three of the largest hosters scooped up by eager telco service providers, with CenturyLink’s $2.5bn Savvis purchase being the most recent. If the remaining telcos don’t move fast enough, they could increasingly be squeezed out of the growing cloud infrastructure space. And competition for the remaining firms is expected to increase as foreign operators could look to enter the US market as well.

Atlanta-based Internap Network Services is among the short list of firms most likely to be taken out next. The company has a wide-reaching geographic footprint, with facilities spread throughout the US, Europe, Asia and Australia. The company’s large US and international presence makes it a particularly attractive target, especially for large CLECs such as tw telecom and PAETEC, or even cable MSO Comcast. However, its footprint could also attract foreign operators looking for synergies in their home markets, as well as entry into the US market. My colleague Antonio Piraino at Tier1 Research recently penned a piece reminding buyout speculators that just a few years ago Internap rebuffed a takeover offer from Indian telco Reliance Communications. He notes that Reliance may once again be a potential suitor, alongside Asian firms Pacnet and China Telecom or European provider Colt Technology Services Group.

Though opportunities for US acquisitions are diminishing, domestic telcos still have options. Given the hyper-competitive takeover market that is expected for remaining US hosters, US telcos may instead look for international deals. As seen by regional stalwart Cincinnati Bell’s CyrusOne unit expanding into London, US telcos are showing no fear of international expansion when it comes to their hosting and colocation businesses. If US telcos look abroad, we wouldn’t be surprised if they checked out Interxion. The Schiphol-Rijk, Netherlands-based firm operates 28 datacenters in 11 countries spread throughout Europe, and pulled in more than €200m in revenue in 2010, a 21% jump from the previous year.

Verizon pays sky-high price for cloud provider Terremark

Contact: Ben Kolada

In a move to accelerate its cloud services, Verizon has announced that it is acquiring cloud and colocation provider Terremark for $1.4bn. As the largest pairing between a telco and a colocation provider, the deal is not only a landmark transaction for the telecommunications industry, but also a significant shift from the growing trend of telcos buying their way into the hosting and colocation sectors by acquiring pure colocation providers.

Verizon is paying $19 per share in cash, a 35% premium over Terremark’s closing price. On an equity value basis, the deal values the target at 4.4 times trailing sales and 18.6x trailing EBITDA. For comparison, the next-largest telco-colo pairing came in May 2010 when Cincinnati Bell bought pure colocation provider CyrusOne for $525m, or 9.1x trailing sales and 16.4x trailing EBITDA. Both Verizon and Terremark’s board of directors have unanimously approved the transaction, and Verizon expects to complete the deal by the end of the first quarter. Terremark’s management team will remain and will operate the company as a wholly owned but independent subsidiary of Verizon.

While earlier acquisitions in this sector were valued based on the growth potential of colocation services, Terremark garnered a higher valuation because of its cloud portfolio, as well as its international presence. During their conference call discussing the acquisition, executives from both companies highlighted the fact that Terremark’s long-term growth lies in its cloud and managed services. This segment provided half of Terremark’s total service revenue during the first six months of its fiscal 2011. Beyond cloud services, the acquisition is also a geographic fit, with Terremark providing Verizon an expanded presence in Latin America, and Verizon providing Terremark additional room to grow in both the US and Europe. As part of the integration, Terremark will assume operations for all of Verizon’s 220 datacenters. (We’ll have a full report on this deal in tonight’s Daily 451.)

After the transaction was announced, shares of competing cloud computing firms soared. While the sector calmed somewhat by midday, shares of Savvis held onto its 15% advance as Wall Street speculated that it might be the next hosting and services company to get snapped up. (Trading in Savvis was more than 10 times its daily average on Friday.) By revenue, the Chesterfield, Missouri-based firm is the largest provider of cloud and colocation services and already sports a $1.7bn market capitalization. As a result, the list of potential suitors is limited, but AT&T stands out as an obvious bidder for Savvis. Just as Savvis is the largest provider among cloud firms, AT&T is the largest provider among telcos and closed 2010 with $124bn in revenue and $1.4bn in cash in its coffers.

Continued M&A activity in hosting sector expected in 2011

Contact: Ben Kolada, Aleetalynn Schenesky-Stronge

The past year set several records for M&A in the hosting and managed services sectors. Industry players, including fellow companies, private equity (PE) firms and telecom carriers, announced a total of 102 deals, eclipsing the previous record set in 2006. The aggregate value of last year’s transactions hit $4.8bn. True, records set in 2010 were partially the result of pent-up demand from the Credit Crisis, but we wouldn’t call the year a fluke. In fact, we expect that 2011 will continue the upward trajectory.

In 2010, we saw record acquisitions of all flavors. In terms of deal size, at an estimated $450m, SoftLayer Technologies’ sale to GI Partners and SoftLayer’s management topped our list of PE purchases of hosting providers. Buyout shops were also active internationally, with both Lloyds Banking Group and Montagu Private Equity each inking deals. Meanwhile, telecom providers were particularly active last year. Telco incumbent Cincinnati Bell announced the largest telecom-colocation transaction on record, and notable mention goes to Windstream Communications for its $310m pickup of Hosted Solutions. Meanwhile, wholesale datacenter provider Digital Realty Trust inked the sector’s largest acquisition of the year (in fact, the largest colocation transaction we’ve ever recorded), paying $725m for Rockwood Capital’s 365 Main portfolio.

On the macroeconomic side, we expect M&A in the hosting and managed services industries in 2011 to be driven by the following: enterprises converting capex to opex through IT outsourcing, increasing acceptance of outsourcing since that model successfully solved internal IT constraints; improving access to capital, allowing providers to continue to expand and innovate in order to meet market demands; and investment for growth, whether that be directly through M&A, via funding provided by PE, or both. On the microeconomic side, M&A will be predominately driven by consolidation and rollup to achieve scale, amass customer bases and add complementary infrastructure and service lines in order to create and expand new service offerings. Click here to see our full review of 2010 and our predictions for 2011.

Is Earthlink looking to link up to a hosting company?

Contact: Ben Kolada

Earthlink on Monday said that it is acquiring regional competitive local exchange carrier (CLEC) One Communications for $85m in cash or stock, plus the assumption of $285m in debt. The deal is Earthlink’s second telecom play of the year, and from our view, it looks like the beginning of a strategy that’s already playing out at Windstream Communications.

The One Communications announcement came just three weeks after Earthlink closed the purchase of southeastern US CLEC ITC Deltacom. Both One Communications and ITC Deltacom are fairly large, as regional CLECs go. ITC Deltacom generated $451m in revenue in the four quarters before its sale, and we understand that One Communications came in at $575m in trailing sales. However, both companies’ sales were declining, and we suspect that the deals were primarily done to build out Earthlink’s facilities-based presence and lay the ground for an eventual hosting play.

If that’s correct, then the ISP will be setting itself on a similar track to the one laid by Windstream Communications. The Little Rock, Arkansas-based company picked up six telecom service providers before announcing last month that it was buying hosting provider Hosted Solutions. At least three other telcos have scooped up hosting companies just in the past two months. The reason for the shopping spree is pretty simple if we consider the relative growth rates of the two sectors: While the core telecom market continues to decline, hosters are putting up fairly solid growth – and that should continue. In their 2010 ‘Multi-Tenant Datacenter North American Market Overview’, our colleagues at Tier1 Research project that the sector’s total North American revenue will hit $11.1bn in 2013, up from an estimated $6.8bn this year.

Select recent telecom-hosting transactions

Date announced Acquirer Target Deal value
December 15, 2010 Telephone and Data Systems TEAM Technologies $47m
November 22, 2010 Sidera Networks Cross Connect Solutions Not disclosed
November 4, 2010 Windstream Communications Hosted Solutions [ABRY Partners] $310m
November 3, 2010 Cbeyond MaximumASP (assets) $31m
May 12, 2010 Cincinnati Bell CyrusOne [ABRY Partners] $525m
March 22, 2010 TDS Telecommunications VISI $18m
January 25, 2010 Cavalier Telephone NET Telcos (assets) Not disclosed

Source: The 451 M&A KnowledgeBase

Windstream makes hosting splash among private equity waves

Contact: Ben Kolada

Windstream Communications bought into business services once again, this time picking up managed hosting, colocation and cloud computing provider Hosted Solutions. The deal is the first hosting play for Windstream, and shows that private equity buyers aren’t the only ones shopping in the sector.

Windstream is paying $310m in cash for Hosted Solutions, which posted $52m in trailing sales. The deal values Hosted Solutions at 12.7x its trailing EBITDA, and more than double the price that ABRY Partners paid for the company in April 2008. Hosted Solutions employs 125, and Windstream initially plans to retain the majority of those employees, though we expect there will be some corporate turnover as part of the integration.

Although telcos have gone shopping for colocation and hosting companies this year (with the most notable deal being CyrusOne’s sale to Cincinnati Bell), private equity firms have dominated the headlines. We recorded 10 hosting and colocation deals this year with deal values of at least $100m. Of this group, half of the targets went to private equity buyers, and four of those deals involved the target company simply jumping from one PE portfolio to another. Further, buyout shops, including firms both in the US and abroad, accounted for nearly half (46%) of the total spending for these 10 deals.

Top 10 hosting and colocation deals of 2010

Buyer category Number of acquisitions Percent of total spending
Private equity 5 46%
Hosting/colocation 3 32%
Telecommunications 2 22%
Total spending $3.8bn

Source: The 451 M&A KnowledgeBase