Triples Its Data Center Count to 48

Less than one month after closing on its $22b acquisition of Qwest, CenturyLink (NYSE:CTL) has announced a $3.2b deal to acquire St. Louis-based data center and managed services provider Savvis (Nasdaq:SVVS), dwarfing Verizon’s (NYSE:VZ) just-closed purchase of Terremark and tripling CenturyLink’s number of data centers to 48.  CenturyLink gained ownership of 16 data centers in its Qwest buy.

Under the terms of the transaction, Savvis stockholders will receive $30 per share in cash and $10 in shares of CenturyLink common stock, for total equity value of about $2.5b.  Another $0.7b in debt will be assumed by CenturyLink. The price represents an 11% premium over Savvis' closing stock price prior to announcement, although some analysts participating in the companies' conference call yesterday seemed disappointed by the valuation.

"The transaction creates a premier managed hosting and colocation provider with global scale in a high growth sector, and is expected to be accretive to revenue growth and cash flow per share," said CenturyLink ceo Glen Post. "Today, businesses are shifting the way they manage their information technology services and infrastructure, and this transaction helps us meet these needs by offering Savvis' leading products and services coupled with CenturyLink's network. We look forward to working with the Savvis team to leverage CenturyLink's significant scale and scope to fully realize the potential of Savvis' capabilities for our combined customers, while also enhancing value for our shareholders and providing opportunities for our employees." 

Combined, CenturyLink and Savvis will operate 48 data centers located in North America, Europe, and Asia with more than 1.9m square feet of gross floor space; a 207k route mile fiber network; and a 190k mile global access network. CenturyLink expects to allow Savvis to continue to operate as a stand-alone division, which will integrate the 16 Qwest data centers and remain based in St. Louis.

Savvis, which was to have reported its first quarter results yesterday, revealed that first quarter revenue was $257m, up 19% versus 2010, and adjusted EBITDA was $75m. For the full year, Savvis anticipates revenue of $1b and cash flow of $290m. CenturyLink expects to see $70m in synergies from the deal, primarily from operating cost savings, but also from reduced capital investment.

The deal, which is the largest data center deal we've seen in two busy years for data center M&A, came in at 3.2x estimated 2011 revenue and 3.4x trailing 2010 revenue. The cash flow multiple came in at 11x based on Savvis' expectation of $290m in 2011; the multiple falls to 8.9x if you add in the $70m in expected syngergies.

Analysts questioned Savvis ceo Jim Ousley on whether or not there was a 'go shop' clause in the agreement that might allow the company to attract another suitor.  They were apparently looking for a multiple closer to the 13.5x pro forma cash flow seen in the Verizon/Terremark deal, but Ousley indicated that other bidders had already participated in the process and that the CenturyLink deal provides a "fair price for our company and our investors."

The market for data centers has been incredibly active for more than a year now, due largely to the growth potential and the synergies that telecom providers see with their existing businesses.  Glen Post said on the call yesterday that the $28b industry will grow to $50b by 2013.  And it does appear that Post and the gang drove a relatively hard bargain in terms of pricing.  Based on the priced deals we've tracked since early 2010, the weighted average revenue multiple is 3.7x while the weighted average cash flow multiple in a data center deal was 12.8x.

The deal also looks good from CenturyLink's point of view due to the relative lack of overlap between the enterprise customers served by the two companies, creating an opportunity for cross selling. Savvis gets to tap CenturyLink's deep pockets; CenturyLink will refinance Savvis' outstanding debt using an existing credit facility as well as a new $2b bridge loan. And finally, Post noted that after the deal closing, more than half of CenturyLink's revenue will come from business customers; Post added that the deal would add about 75 basis points to CenturyLink's revenue growth rate.