Are Internet infrastructure exits interconnected?

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

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

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