Tag: Oak Hill Capital Partners

Intermedia ‘acq-hires’ Zlago

Ben Kolada

Contact: Ben Kolada

Less than three weeks after its own sale to private equity firm Oak Hill Capital Partners, mass-market hosting provider Intermedia has already inked its first acquisition, picking up complementary vendor Zlago. From our view, this deal looks like more of an ‘acq-hire’ than the typical bolt-on purchase that PE-backed hosting providers are known for. Overall, talent acquisitions are rare in the hosting industry, but this transaction is particularly notable given Zlago CEO’s past, and the impact he could have on Intermedia’s future M&A.

Talent certainly seems to be the primary driver for this deal. Indeed, Intermedia goes so far as to highlight Zlago’s ‘cloud expertise’ in the press release announcing the move. But while talent acquisitions throughout tech M&A tend to involve engineers, we wouldn’t be surprised if the talent that Zlago provides is more M&A-focused. Zlago CEO Michael Gold, who joins Intermedia as president, was previously CEO of cloud services vendor Sphera, which he led through to its sale to Parallels in September 2007. We expect that Intermedia and Oak Hill Capital will draw on Gold’s previous M&A experience to target higher-end cloud providers as it looks to grow through M&A.

We’ve noticed that PE firms tend to refocus their mass-market hosting companies on more specialized, higher-end cloud services. This strategy most recently generated champagne-popping returns for Nazca Capital, which maneuvered acens Technologies through its four-year ownership to higher-end cloud hosting services. That deal played out particularly well for Nazca, since we gather that acens’ sale to Telefónica provided the Spanish buyout shop with a greater than 100% return on committed capital. We’ll have a full report on the Zlago purchase in tomorrow’s Daily 451.

Via Oak Hill, ViaWest expands

Ben Kolada

Contact: Ben Kolada, Jeff Paschke

In its first acquisition under new ownership, ViaWest announced today that it is buying three Salt Lake City datacenter facilities from Consonus Technologies. The transaction is the first in a line of expected deals after the company received a capital infusion from its sale to Oak Hill Capital Partners in April.

Financial terms weren’t disclosed; however, our analysts at Tier1 Research estimate that the transaction was in the range of $35-40m. The acquisition brings ViaWest’s total Salt Lake City datacenter count to six, and comes just three months after the vendor announced that it was adding 14,000 square feet to one of its existing Salt Lake City facilities.

Indeed, even at the high end of our estimated range, $40m may seem to be a bargain for three facilities with a combined total of 100,000 square feet of datacenter space. However, we would point out that ViaWest is not in the business of owning the shell building, but rather just the internal infrastructure (generators, switches and all furniture and fixtures). Its facilities are generally maintained on a long-term lease basis.

Under Oak Hill’s wing, we expect ViaWest to continue to acquire additional properties. (The firm inked three other deals under previous ownership, according to The 451 M&A KnowledgeBase.) Given its past acquisitions, ViaWest appears to prefer buying into new markets, rather than acquiring properties in markets where it already has a presence. As such, we don’t expect to see another market-consolidating play anytime soon. The company has a strong foothold in the western US – Salt Lake City follows Denver and Dallas as the firm’s third-largest market, in terms of usable datacenter space – but ViaWest executives have told us in the past that acquisitions will not necessarily be limited to the western states.

Private equity goes back to the hosting table in a big way

Ben Kolada

Contact: Ben Kolada

So far this year, three private equity (PE) firms have each shelled out at least $400m for a hosting provider, making 2010 the most active year for big-ticket hosting deals for PE shops. And these firms are no novices. Welsh, Carson, Anderson & Stowe, GI Partners and Oak Hill Capital Partners have a combined $32bn in capital under management, and each has had previous experience in the hosting sector. The fact that they’re coming back to the hosting market – and paying relatively rich valuations to do so – is a hearty endorsement of the sector’s long-term growth potential.

In the most recent deal, Welsh Carson teamed up with Peak 10 management to buy the company from Seaport Capital and McCarthy Capital. Although terms of the transaction weren’t disclosed, we understand the buyout consortium paid just north of $400m for Peak 10, or about 12 times the company’s annualized 2010 EBITDA. For comparison, Savvis, in which Welsh has been invested since 1999, is currently trading at 5x annualized EBITDA.

In another management buyout, SoftLayer Technologies’ management announced in August that it was partnering with GI Partners to buy the dedicated hosting specialist from its angel investors. Again, terms weren’t disclosed, but we believe the deal valued SoftLayer at about 10x its annualized EBITDA, or about $450m. As my colleagues Philbert Shih and Aleetalynn Schenesky-Stronge noted, GI Partners is a well-known participant in the hosting and Internet infrastructure space, having invested in Digital Realty Trust and The Planet. GI Partners intends to combine The Planet and SoftLayer, with SoftLayer’s management left in charge. The combined company, which would have $270m in estimated revenue for 2010, could go public as early as next year.

SoftLayer was GI Partners’ second hosting play of the year. In April, the firm banded together with Oak Hill Capital and ViaWest’s management to buy the company from a consortium of PE investors. Oak Hill Capital was the lead investor, with GI Partners and management retaining minority stakes. We estimate the price of the deal at $420m, which works out to about 10x ViaWest’s cash flow. Oak Hill Capital isn’t new to the datacenter industry, having previously invested in TelecityGroup.

More PE moves could be in the works, as we’re aware of quite a few more properties for sale. If the flurry of M&A activity during the recent VMworld conference is any indication of what happens when a group of likeminded individuals gets together, our 2010 Hosting & Cloud Transformation Summit could lead to a number of hosting and Internet infrastructure deals. The conference opens today in Las Vegas and continues through Wednesday.

Select PE hosting deals in 2010

Date announced Acquirer Target Deal value
September 1 Welsh, Carson, Anderson & Stowe/Peak 10 management Peak 10 $400m*
August 4 GI Partners/SoftLayer Technologies management SoftLayer Technologies $450m*
April 20 Oak Hill Capital Partners/ViaWest management ViaWest $420m*

Source: The 451 M&A KnowledgeBase *451 Group estimate