Telecity; Market Cap (as of 8/5/2015): £2.22bn
Interxion; Market Cap (as of8/5/2015): $2.05bn
Equinix; Market Cap (as of 8/5/2015): $15.17bn
Digital Reality; Market Cap (as of 8/5/2015): $8.3bn
Introduction
On May 8, Telecity, a British data center operator, received a cash and stock offer of £2.3bn from its US competitor Equinix. This puts pressure on a previous all-share merger agreement made in February between Telecity and Interxion. Now the board of Telecity has to decide between merging with Interxion or advise on selling itself to Equinix. Moreover, this decision is reflective of overall trends in the data center industry where global players are looking to consolidate thus creating an enticing chess game. Below we will analyze the dilemma that the board of Telecity is facing and how it fits in the current industry trends.
The industry
The data centers industry is in the midst of a transitory period with demand overwhelming supply. As multinational corporations struggle to handle increasingly large amounts of data, information is being outsourced to data centers for analysis and interpretation. With the industry expected to develop significantly, analysts have identified opportunities and threats for the industry’s short-term future. The four key factors include disruptive competition, which would deteriorate margins, cloud computing dominance, a convenient and cheaper substitute to data centers, economic warfare particularly between China and the west, and nationalism that could shift the focus from large enterprises benefitting from economies of scale to smaller data centers deemed more reliable.
As the market for data storage experiences rapid growth – global internet traffic predicted to triple in the next five years and cloud computing CAGR to reach 36% in 2013 to 2016 period – the industry is undergoing fierce consolidation with Equinix and Telecity also being involved. Recently, Equinix acquired Switch and Data, a US data provider, and a Brazilian firm, ALOG Datacenters, to expand the company’s presence worldwide. On the other hand, Telecity has been the subject of interest from an array of international acquirers such as Japanese company NTT and Digital Realty.
About Telecity Group
Telecity is a UK based data center provider whose clients range from medium to large-scale enterprises, with centers all over Europe including Amsterdam, Dublin, Helsinki, Istanbul, London, Manchester, Milan, Sofia, Stockholm and Warsaw. Telecity provides “secure and highly-connected environments for the IT and telecoms equipment that powers the digital economy”. Telecity offers an “internet exchange service” between networks such as the “AMS-iv” center.
Telecity is an appealing acquisition target for rival data centers due to the strategic positioning of its data centers worldwide, which enables efficient access to telecom providers and low latency connections for customers who request it for popular services such as television streaming.
About Equinix
Equinix is the world’s largest data center company. As interconnection leader, Equinix has 4,750+ customers throughout 33 markets on five continents. Based in the United States, Equinix also offers internet exchange services to large clients to improve speeds, interconnectivity and reliability. Moreover, Equinix during the last decade has been proving its ability in expanding revenue through a tight cost control that, nowadays, enabled the firm to look for acquisitions and further expansion.
About Interxion
Interxion is a Dutch company founded in 1998. Like the other two firms, Interxion is a provider carrier-neutral colocation data center services, operating 34 data centers in 11 European countries. Some of its clients are financial services companies, high- frequency trading firms and clearing houses.
The Deal
In February, English Telecity and Dutch Interxion agreed to a non-binding agreement in which both companies would merge through an all-share deal to create a larger and more competitive data services provider. As part of the merger, Telecity agreed not to actively search for alternative proposals. However, the contract did not preclude the firm from receiving any offers.
In order to impede the creation of such a strong European rival able to compete on a global scale, Equinix has made a bid to purchase Telecity for £2.3bn with 54% cash and 46% stock. The offer would represent a 27% premium to Telecity’s closing price on Wednesday, reflecting in a share price jump of 23%, meaning there are expectations of this deal actually going through. Telecity’s Management has claimed that it is their fiduciary duty to review the offer, regardless of previous agreements. Equinix has until June 4th to announce its intention to make a firm offer for the company after a period of due diligence has been completed.
Meanwhile, Interxion appears to be relaxed regarding its previous offer, claiming: “Interxion continues to believe that the pending merger with Telecity Group is a strategically compelling combination that delivers meaningful value to Interxion and Telecity Group shareholders as well as their customers.” Nevertheless, Intrexion could be left in the outskirts of European market, if Equinix succeeds, and would be likely pushed to find another merger.
Is Telecity’s board in a tough spot?
The initial deal between Telecity and Interxion would create a 15% dominating market share in Europe, with Equinix coming next at 9%. Moreover the NPV of cost synergies are estimated to be €600m, an enticing proposition considering the already leading operating margins of both firms. Earnings impact of the merger is expected to be neutral in the first year and accretive going forward, while the ownership will be split with 55% Telecity and 45% Intrexion shareholders. All seems good until we understand that the combined company will be highly focused on Europe and will have to strengthen its presence globally – each one is already in weaker rivalry to Equinix who focuses on the largest companies by providing them global support. The result is a big fish in a small pond.
Equinix came in with an offer with a 27% premium and proposition to create a leader in Europe with a global footprint. Telecity’s board has to propose what is better for the shareholders: an immediate payoff and a bet into a global player, or a bet on a combination of highly Europe-centered companies. The board may also consider that Equinix might be bidding to avert Digital Reality, another large US rival, to expand in Europe itself. It is a game between Equinix and Digital Reality with Telecity’s shareholders profiting from it and Interxion being left for possibly another bid, maybe even from Digital Reality. Whether Equinix is successful or not, Telecity’s decision could transpire into a marvelous HBR case study.
Advisors
Goldman Sachs, Greenhill & Co., Barclays Investment Bank and Oakley Capital Limited were the financial advisor for Telecity while Perella Weinberg Partners LP and Bank of America Merill Lynch were acting as advisors for Interxion on the original merger proposition.
[edmc id= 2762]Download as PDF[/edmc]
0 Comments