After CenturyLink-Savvis, telco consolidation will target the midmarket

Contact: Ben Kolada

CenturyLink’s Savvis acquisition, which closes today, is the largest telco-hosting deal on record, though we expect that it will be followed by a rise in smaller telco-hosting pairings. As the number of large hosting targets, which typically serve enterprises, continues to shrink, we anticipate that telcos that were unable to get their hands on prized enterprise properties will still look to enter this industry by consolidating the fragmented small and midsized hosting market.

Based on the most notable telco-hosting deals to date, Verizon’s Terremark buy and CenturyLink’s reach for Savvis, enterprises appear to be the primary market for large telcos looking to sell cloud services. However, we are noticing emerging interest from telcos looking to serve SMBs. Last month we saw Madrid-based telco Telefónica spend a reported $110m for cloud hoster acens Technologies, which serves more than 100,000 SMB customers throughout Spain. On a much smaller scale, in February local competitive carrier CornerStone Telephone announced that it was picking up consumer and SMB-focused Web hoster ActiveHost for an undisclosed amount.

We’ve written before that the greatest opportunity for telco-hoster combinations may actually be for regional and smaller telcos to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations, typically between 6-8 times last-quarter annualized EBITDA. However, if telco-hosting consolidation grows at this level, the acquired properties will most likely be colocation-focused, since most small hosting providers founded their business on colocation services.

Intermedia ‘acq-hires’ Zlago

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.

Telefónica nabs cloud hosting firm acens Technologies

Contact: Ben Kolada

Consolidation between the telecommunications and hosting industries continued today with Madrid-based telco Telefónica purchasing cloud hosting and colocation provider acens Technologies from buyout shop Nazca Capital. Although this deal seems to be just another in the long line of telco-hosting pairings, it actually represents one of the biggest foreign consolidations that we’ve seen.

Terms of the transaction weren’t disclosed, though public reports claim that Telefónica shelled out approximately €75m ($110m) for the hosting vendor. With some loose math based on applying acens’ historical growth rate to the €30m ($43m) in revenue that Nazca claims acens generated in 2009, we estimate that the company’s 2010 total revenue was likely in the ballpark of €35-40m ($46-53m). If our estimates are correct, that price-to-sales valuation would be slightly less than what Nazca paid for acens in January 2007, though it would still represent a nearly 100% return on capital in just four years. We’ll have more context on this deal, including analysis from our cloud infrastructure and hosting colleagues at Tier1 Research, in a full report in tomorrow’s Daily 451.