Entries in Deals - Data Centers (10)


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.


Carter Validus Mission Critical REIT Makes $95m Data Center Buy

Maryland-Based REIT Bought Richardson, Texas Facility Last July

Maryland-based Carter Validus Mission Critical REIT, Inc. (Carter Validus) filed on form 8-K with the SEC on November 25, 2011 that it has entered into an agreement to acquire 180 Peachtree, a 338k square foot data center with parking facilities in Atlanta, from Peachtree/Carnegie, LLC. The purchase price is $94.75m and the transaction is expected to close in January 2012. Carter Validus was formed in 2009 and is in the process of raising funding for additional data center acquisitions. It also spent $28.9m in July for a 20k square foot facility in Richardson, Texas.

Earlier this year the company filed a Form S-11 registration statement whereby it is offering for sale to the public on a “best efforts” basis a minimum of 200k and maximum of 150m shares of common stock at a price of $10/share. Another 25m shares are also offered pursuant to a distribution reinvestment plan (DRIP) under which shareholders may elect to have distributions reinvested into additional shares. In all, Carter Validus is seeking to raise upwards of $1.7b. Through September 30, the company had issued about 1.9m shares for gross proceeds of just under $19m.

180 Peachtree is currently 100% leased to six tenants, including Switch and Data, Level 3 Communications, and Atlanta's 911 center operations. The $94.75m price tag implies a moderate price per square foot of $280. By way of comparison, in priced deals this year to date, the average data center deal price per square foot is more than $1,600.

Last summer Carter Validus spent nearly $30m for a Richardson, Texas facility, or about $1,445 per square foot. Pro forma revenue reported in the company’s latest 10-Q indicate run-rate revenue of just under $3m annually, indicating a run-rate revenue multiple of nearly 10x. The Richardson facility is fully leased to an unnamed national health organization with annual revenue of $9b.

With the addition of these latest two deals, we’ve now tracked data center deals in 2011 involving 76 facilities worth more than $5.6b. For the deals where we had financial information, the weighted average multiple of revenue was 5.4x; the weighted average OIBDA multiple is 15.8x, reflecting the very high growth anticipated for the sector.


PAETEC Deal Clears Key Hurdles

Shareholders Approve Deal, City Opposition Withdrawn

Since we last looked at Windstream’s (Nasdaq:WIN) pending $2.3b PAETEC acquisition on TDA, the deal has received key regulatory approvals, and Windstream has navigated some key opposition to the purchase, keeping it on track for its late 4Q11/early 1Q12 close.

In late August, PAETEC announced that it had received notice from the Federal Trade Commission of early termination of the waiting period for its merger. And on October 30th, PAETEC shareholders voted overwhelmingly (99% approval of voters present) to approve the deal, through which PAETEC stockholders will receive 0.460 shares of Windstream common stock for each share of PAETEC common stock.

While Windstream sailed through the FTC and PAETEC shareholder approvals, garnering support from PAETEC’s hometown, Rochester, NY, and New York state proved more difficult (and costly). On September 29th, the city decided to wage war with Windstream, filing its formal opposition to the PAETEC deal with the FCC. The subject of the complaint: concern that Windstream would renege on a PAETEC commitment to relocate its headquarters to downtown Rochester.

This past January, Arunas Chesonis, ceo of PAETEC, along with then mayor of Rochester, Robert Duffy, signed an agreement that would see PAETEC construct its corporate headquarters in downtown Rochester, creating what would be the flagship building in the city’s redevelopment. In what was dubbed “The PAETEC Project,” Rochester invested $60m of state and city funds to create a shovel-ready building site for PAETEC. In return, PAETEC's commitment was to construct a new building, to move existing jobs downtown, and to occupy the 225 square foot facility for 20 years. To fund the construction, PAETEC committed to obtain $34m in loans and use $5m of its own equity.

When Windstream announced its merger with PAETEC in August, the initial reaction in Rochester was that “The PAETEC Project” was dead before it even started. After Chesonis confirmed that 800 Rochester-area workers would lose their jobs post-merge, it became even more evident that Windstream didn’t plan to make good on PAETEC’s commitment. As job threats loomed, animosity towards the deal built.

The city filed its comments with the FCC and the New York public service commission, arguing the deal would adversely impact Rochester residents. US Senator Charles Schumer joined the city, putting pressure on Windstream to honor PAETEC’s commitment. Initially, Windstream and PAETEC fired back at city and state’s criticism, filing a joint response to the FCC.  The pair argued that concerns about the city and job losses were not within the FCC’s power to review, and that efficiencies (job losses) are created in every merger and couldn’t be used to block the deal. Political pressure however mounted, and Windstream decided to compromise.

At a press conference Monday, Windstream ceo Jeff Gardner announced that the company will move 335 employees to downtown Rochester. It will occupy 67k square feet of office space under a 15-year lease with annual payments around $1.2m, compared to the initial PAETEC agreement of a 225k square foot building and a 20-year lease.  

The city subsequently withdrew its complaints from the FCC and New York Public Service Commission. While Gardner maintains that the agreement to stay in Rochester was not a political move, the lease agreement included a stipulation that the city withdraw its complaints and support Windstream’s efforts to get regulatory approval. The New York Public Service commission is set to weigh in on the deal during its session on November 17th.

With the end of the regulatory hurdles in sight, the real work for Gardner and Windstream is set to begin after the deal’s close. Both Windstream and PAETEC turned in lackluster 3Q11 results, and Windstream has set aggressive cost synergy targets following the deals close—$50m in the first year and $100m per year after three years.

PAETEC reported a loss of $17.1m in 3Q11, on revenues of $536.3m. While its revenue was up 31% YoY in 3Q11, the gains were due to its acquisition of Cavalier Telephone. PAETEC, like Windstream, has generated top line growth through M&A in recent years, but the company has been in the red since 2007. In that time frame, PAETEC has spent $2.65b on its six acquisitions, but the deals have not benefited PAETEC’s bottom line.

We recently reviewed Windstream’s 3Q11 results in Phone Numbers, and the story once again was: where’s the growth?  Pro forma revenue was down at Windstream YoY in 3Q11 to $1.02b, as earnings and operating margins dropped as well. Acquisition and merger related costs, not cost synergies appear to be having the largest impact on Windstream’s earnings.

The struggle and compromise between the city of Rochester and Windstream reveals just how difficult (and ugly) a road Windstream has ahead of it in order to meet the $100m cost savings it projects. Windstream is set to invest around $18m into the Rochester development, and take on around $1.2m in annual lease payments—costs it had not factored in when projecting the PAETEC deal’s synergies. And while the city’s opposition to the deal was ultimately withdrawn, the root of the city’s complaint and the main driver of the deal’s synergies— the loss of 800+ jobs at PAETEC—is still likely to occur.


Data Center M&A Heats Up as Global Demand Rises

Spending on Data Centers to Reach $99b in 2011

The data center market has heated up over the past two weeks, with the announcement of a pair of acquisitions.  The deals come at a time when the demand for data storage continues to rise.  According to a report released Thursday by technology research firm, Gartner, spending on data center servers, storage and networking equipment will rise 13% to $99b in 2011, above pre-recession levels.

In a deal announced on October 6th, global data center provider Digital Realty Trust (NYSE:DLR) acquired a data center located in Sacramento Country from Seattle-based Telecom Real Estate Services for $30m. The property is located at 11085 Sun Center Drive in Rancho Cordova, and measures 69,000 square feet.  The center has a history of use by some large players in telecom—first MCI, then Verizon (NYSE:VZ).  Both providers used the data center as a telecom switch.

With the acquisition, Digital Realty expands its California footprint, more than doubling its presence in the Sacramento market.  The company owns and operates a 63,000 square foot property on Gold Camp Drive, also located in the city of Rancho Cordova.  The purchase however is just a drop in the bucket compared to Digital Realty Trust’s overall portfolio. The data center giant owns 98 properties throughout Europe, North America, Singapore and Australia.  Its real estate holdings combine to measure 17.3m square feet.

Based on the purchase price of $30m, Digital Realty paid approximately $435 per square foot in the deal.  The property was particularly attractive based on the fact it is fully leased on a long term basis to SunGard Availability Systems Inc.  By contrast, Digital Realty is still looking for co-location tenants in its Gold Camp Drive data center. As part of its acquisition strategy, Digital Realty seeks properties that have predictable, long-term cash flows (rents), making data centers with existing tenants locked in logical targets. 

Scott Peterson, chief acquisitions officer at Digital Realty, commented on its recent purchase. “This acquisition adds a newly renovated, high quality, and fully leased operating asset to our portfolio at an attractive going in cap rate. The property is located near our 3065 Gold Camp data center facility, expanding our presence in the Sacramento market and contributing to our revenue stream with a long term, stabilized lease.”

In addition to being fully leased, the data center’s Sacramento location is increasingly attractive for companies to store their data thanks to cheaper electricity and relatively inexpensive real estate.  Twitter, among other companies, has recently leased space in the Sacramento area.

On the heels of Digital Realty’s purchase, Denver-based Hosting.com announced that it had acquired Dallas-based managed services provider and data center operator, Neo Spire.  Hosting.com offers cloud hosting and recovery services and is owned by private equity firm, Charlotte-based Pamlico Capital.  While financial terms of the Neo Spire deal were not disclosed by the company, Golub Capital recently provided a $78m loan to Hosting.com in connection with the acquisition.

Neo Spire owns and operates data centers in both Dallas and Atlanta, located in close proximity to major fiber networks.  The connection at its Atlanta-based facility, a 50,000 square foot property, sits upon on a main fiber backbone in the city.  With its acquisition, Hosting.com’s total data center space now totals 131k square feet with a footprint in Dallas, Denver, Irvine, Louisville, Newark (DE) and San Francisco.  

While the Digital Realty purchase was more of a straight forward data center deal, there is a large managed services piece to Hosting.com’s acquisition.  Neo Spire offers a full range of hosting solutions: fully managed hosting, dedicated server hosting, private cloud hosting and colocation services. In addition, Neo Spire offers a compliance based approach to network and data security framed around the PCI Security Standards that helps companies navigate complex industry and government regulations.

Hosting.com has suggested that it will look to cross-sell its new Neo Spire clients with its own portfolio of cloud services, specifically its cloud replication solution that provides offsite data protection and disaster recovery. In late August, Hosting.com launched its new data loss prevention service that utilizes VMware to enable automated replication of a customer’s virtualized data from a Hosting.com data center, to a recovery site.

Looking back at the M&A in data centers this year to date, 121 properties measuring near 4.4m square feet have been dealt in selected transactions. While price tags were not disclosed on a number of the acquisitions, the priced deals have totaled near $5.5b. Based on these numbers, Gartner’s bullish outlook for the data center market is reinforced.  


EarthLink Addresses Cloud Security Concerns with Latest Acquisition

ISP Purchases IT Security Expert Business Vitals

Internet service provider EarthLink (Nasdaq:ELNK) has been on a shopping spree of late, acquiring multiple communications providers as it pieces together its managed services business. In August, EarthLink finalized its most recent deal, the purchase of Business Vitals. The move enhances EarthLink’s package of cloud IT services, and addresses a main concern for companies hesitant to embrace the cloud: information security.

South Carolina-based Business Vitals offers a range of IT solutions, but specializes in providing security measures. With its purchase, EarthLink acquires a Tier IV secure data center, a security operations center and a growing IT outsourcing business. Business Vitals' security measures combine threat monitoring and theft protection solutions with data vaulting, remote backup and data restoration--utilizing its data center. The data center will also help connect EarthLink’s fiber network, which is approaching 29k miles. While terms of the deal have not been disclosed, EarthLink confirmed to JSI Capital that the deal was much smaller than its recent deals, in the $1m-$10m range.

EarthLink has purchased a number of enterprise-centric, communications providers in the eastern U.S. over the past year, as it shifts its revenue mix more heavily towards its business services segment. It completed its $370m acquisition of integrated telecom provider One Communications in April, closed its purchase of hosted VoIP provider STS Telecom in March, and finalized its deal to buy ITC^Deltacom in December. 

Prior to these deals, in 2Q10, EarthLink generated over two thirds of its top line from consumer Internet customers, compared to only 23% in 2Q11. Currently, revenues from its business segment now represent 74% of EarthLink’s overall top line, compared to 22% a year ago. The purchases added density to its existing fiber networks, increasing its gross margins up to 50% in the process, according to the company.

While the Business Vitals acquisition expands EarthLink’s managed services portfolio with added IT outsourcing capabilities, it also serves as a complement to EarthLink’s recently launched cloud hosting business—EarthLink Cloud. In acquiring the security functions provided by Business Vitals, EarthLink makes its cloud hosting and managed services more attractive to SMB’s weary of data privacy and security. 

According to a recent study by the Evans Data Corporation, security was the most commonly referenced barrier for companies to move towards cloud computing—listed as the top concern by 30% of survey participants.  EarthLink management hopes the addition of Business Vital’s security expertise will remove this barrier, growing its cloud hosting business in the process.

"EarthLink is building a full range of managed IT services that focus on security as a key capability," said Brian Fink, EarthLink evp of managed services. "Business Vitals is an important extension of our managed services portfolio, and we will be actively leveraging the assets, capabilities and proven expertise we have acquired to enhance our national managed services business."

In a July presentation to investors, EarthLink framed its recent “cloud” efforts as a natural progression of its core business calling itself “The Original Cloud Company.” EarthLink touted its data center operations, strong online customer support, and online billing as virtual services that it has been providing for years. The ISP also pointed to a projected 25% compound annual growth rate in the use of virtual private networks over the next three years as a driving factor in its hosting venture.

With security concerns addressed with its purchase of Business Vitals, and the continuing expansion of its fiber footprint on the east coast, EarthLink feels that it is well positioned for managed services growth in the future.