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North State Diversifies Services with DataChambers Buy

ILEC to Acquire North Carolina-based Data Center Operator

High Point, North Carolina-based North State Communications announced on December 15th that it has entered into an agreement to acquire Winston Salem-based DataChambers, a data center operator and managed services provider. Financial terms of the deal were not disclosed. With its acquisition, North State becomes the most recent LEC to venture into the data center and managed service space, joining Warwick Valley Telephone (Alteva) and Twin Valley Telephone (ISG Technologies).

DataChambers is a ten year old company that provides data colocation and disaster recovery services for small-to-medium sized businesses within the Triad region (Greensboro, Winston-Salem and High Point) of North Carolina. The company currently operates two data centers in Winston-Salem, encompassing 120k square feet of data storage and disaster recovery space. It has also expressed interest in adding a third data center in order to increase its capacity. DataChambers' current roster of clients includes businesses from a variety of industries, including North State itself.

Upon the deal’s close, DataChambers will operate as a wholly-owned subsidiary of North State and Nick Kottyan will retain his position as ceo of the acquired entity. North State however will not acquire DataChambers’ records management segment, which provides hardcopy paper storage and management for customers.

The deal makes sense for North State on multiple levels. Geographically, North State operates in the same Triad Region of North Carolina that DataChambers calls home, and both companies serve the same business customers. From a competitive standpoint, the acquisition provides North State with a portfolio of business-centric services that it can offer alongside its broadband voice, video and Internet services, differentiating itself from other communications providers in the area. The independent LEC will also be able to cross-sell its existing business customers on DataChambers’ colocation and disaster recovery services, generating incremental revenue in the process. 

Most importantly, the data center/managed services space offers North State the potential for growth. Gartner projects data center spending to reach $99b in 2011, a 12.7% annual increase from 2010, and it forecasts that figure to rise to $127b by 2015. North Carolina in particular has become a hot-bed for data center development—with the likes of Apple and Google spending north of $1.6b to build properties in the state—thanks in part to its cost effective electric grid and relatively cheap land.

Consistent with the strong industry growth, DataChambers has improved its top line significantly over the past three years. The company grew its revenues from $3.5m in 2007 to $6.8m in 2010, expanding at a compound annual growth rate of 26% over that time frame.

While North State has not released details on how much it will pay for DataChambers, we have seen a number of priced data center deals over the past year, allowing us to make some educated estimates on the deal’s price tag. The weighted average revenue multiple for observed data center purchases in 2011 is around 5.4x while the median revenue multiple comes in at 4.3x. Based on these levels, and using DataChambers’ $6.8m revenue in 2010, we derive a price estimate in the range of $30-$36m.

In September, North State attempted to increase the visibility of its business services, rebranding its business segment “North State Business.” It stated that the name change reflects the type of customers that are critical to the LEC’s growth and longevity. The acquisition of DataChambers reinforces this sentiment.