Issue 18, October/November
FOCUS LONDON
Andrew Harrington, founder of AHV Associates LLP, a London investment firm, says that all aspects of the data center world have performed very well. “The top 30 to 40 data center stocks have outperformed the market by 200% over the last couple of years. Nothing is truly separate from the business cycle, but the data center sector is as close it gets as the demand side continues to look exceptionally good,” Harrington says.
This is being driven by more for less lower cost storage and connectivity which is propelling digital services forward and with these demand for data center space.
On the colocation side it used to be that space and power connectivity was mostly rented to application providers — but there was always the imperative that vertical integration would provide better provision of applications. That is a trend that has been accelerating over last couple of years. And as the data center players have moved into the application space, application providers — especially telcos – have moved into the data center space.
There is a very good demand-side story for data centers and their services.
SUPPLY SIDE STORY
On the supply side the story is not so strong, unless you operate an established business, as Harrington points out: “A fundamental aspect of the investment market over the last four years is the reduced tolerance of risk.”
“On the supply side it is not so good in the sense that it is very capital intensive to build a data center. [You have to] get the land, get planning permission and build the shell, all before you can get customers. Over the last several years there has been a limitation of funds for greenfield sites. There are a number of projects that have so far not been able to get
going.The established players, all the big guys like Telecity, Interxion, Global Switch and DRT, have already got the business so they have been able to raise money. Valuations have been good and debt has been raised cheaply. Capital is cheap for those businesses,” Harrington says.
The view of single-site projects is less favourable, especially when there are lower risks to be had in a sector where hunger for capital from multinational and regional players abounds. n
US CAPITAL MARKETS STILL HUNGRY FOR DATA CENTER OPPORTUNITIES And recent M&A activity has reportedly made them even hungrier. By Yevgeniy Sverdlik
Players in the capital markets have retained confi dence in the data center space and according to some, demand among lenders and private-equity fi rms for lucrative data center deals is outweighing supply, especially since so much M&A activity has taken place in the space.
Horace Zona, head of the media and communications investment banking group at SunTrust Robinson Humphrey, says impact of mergers and acquisitions in the market has been felt on both supply and demand sides.
“I’d say the interest is growing and yet the supply and opportunities for investment are shrinking because of the consolidation trends,” he says. “[The] challenge with all the M&A is that debt investors and equity investors have had fewer opportunities to put their money to work.”
Recent examples of this consolidation include CenturyLink’s purchase of Savvis for US$2.5bn, Verizon’s $1.4bn takeover of
Terremark,
Windstream’s $2.3bn bid for Paetec and Time Warner’s $230m NaviSite deal. These are all examples of large multifaceted businesses that see value in the data center space, Zona says.
A few sponsor deals have gone through as well, one of the most recent ones being the Telx deal. The colocation and interconnection company’s previous owner GI Partners sold it to Abry Partners and Berkshire Partners for an undisclosed sum in August.
Zona says nearly every fi nancial sponsor he meets lately asks him where in the data center business they can put a chunk of money, as good deals are short. “The supply just isn’t meeting demand,” he says.
One change this dynamic has triggered was an increased interest by investors in greenfi eld builds, as compared to early 2011. Zona says
“The capital aspect of the model continues to be a drag on how institutional investors perceive the business model,” Zona says.
What is happening now is further development of the dynamics that really started as the most recent global economic was winding down. Investors noticed how well data center businesses performed over the course of the recession and the amount of organizations willing to put money into the space increased, compared to pre-recession years.
Before the meltdown, the broader fi nancial community viewed the business as risky, and only a handful of players knowledgeable about the market fi nanced data center builds.
This is becoming less and less of a case, as data center providers continue to affi rm investor confi dence they’ve recently earned.
many start-ups, where able to, fi nance such projects — something that was not easy to do earlier this year.
The trend is true across all types of data center business, be it power and space, managed hosting or beyond. “We’ve seen it all across the board,” Zona says.
Zona expects more consolidation to come. “There’s some other very quietly shopped businesses out there that I think we’ll see some news on in the near future.”
Ryan Golding, managing director for leveraged fi nance at Capitalsource, while disagreeing that consolidation has shrunk the amount of investment opportunities, agrees that capital activity in the space remains robust. “Both [private-equity] fi rms and lenders are still very active with continued strong underlying growth trends,” he says.
While there is lots of activity in this area, institutional investors still have a few things to learn about the sector, in Zona’s opinion. He says that while understanding of the market among them is growing, investors still do not understand it “as well as they should”.
Wall St has chunks of money looking for data centers
Image: Paul Sparkes
www.datacenterdynamics.com 37
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