CyrusOne (NASDAQ: CONE), a data center operator with a market capitalization of $9.5bn+ and an enterprise value of $12.8bn+, has been named in press reports from Reuters noting that it is “exploring strategic alternatives that include a potential sale of the company”. With the company possibly for sale (again), we provide an overview of the business and a breakdown of recent developments at CyrusOne to detail how the data center operator may have come to this decision.

CyrusOne – Data Center Business For Sale

CyrusOne operates 55 data centers, representing 933 megawatts of power capacity in locations throughout the United States and Europe. In aggregate, these data centers comprise 8.3 million gross sqft, of which 4.9 million is colocation sqft. CyrusOne’s primarily wholesale data centers support 939 customers, featuring a ~50% revenue contribution from cloud service providers (e.g., Microsoft).

Financial Performance in Q2 2021

In Q2 2021, CyrusOne reported revenue of $285m, a 4.7% decrease quarter-over-quarter, and adjusted EBITDA of $142m, growing 1.1% quarter-over-quarter. As a result, the company’s EBITDA margin expanded by 2.9%, from 47.0% in Q1 2021 to 49.9% in Q2 2021.

Full-Year 2021 Guidance

For full-year 2021, CyrusOne projects revenue of $1.155bn to $1.185bn. Additionally, the company forecasts adjusted EBITDA of $575m to $590m. Finally, the mid-point of the company’s guidance implies a year-over-year increase of 13% and 8.5% in revenue and EBITDA, respectively.

Investor Day – Pressure Builds on CyrusOne

In June 2021, during CyrusOne’s Investor Day, the company held a particularly disappointing question & answer session with investors. Specifically, CyrusOne had cautious expectations for data center renewal rates, on like-for-like leases, to decline, on a cash basis, by 18% to 22%, compared to current market rates, over the next 3 to 4 years.

Consequently, following CyrusOne’s Investor Day, investors reacted with disappointment to these disclosures, amongst other headwinds. In turn, the stock declined 6.4% for the trading session.

Chief Executive Officer – Resigns from CyrusOne

In July 2021, CyrusOne undertook a separation with Bruce Duncan, the company’s President and CEO, replacing him with David Ferdman, as the company’s interim President and CEO. Remarkably, Bruce Duncan’s tenure at the company lasted slightly more than one year. Moreover, this latest CEO change left CyrusOne maintaining a total of four CEOs over the past 18 months.

Notably, Ferdman was a co-founder of CyrusOne and served as President and Chief Executive Officer from 2000 until June 2010.

Event-Driven Shareholder – JANA Partners

During the quarter-ended March 31, 2021, JANA Partners, an event-driven hedge fund manager which “utilizes shareholder engagement to unlock” fundamental value in public companies, initiated a long equity position in CyrusOne.

As of June 30, 2021, JANA Partners owns 1.7 million shares in CyrusOne, equivalent to a 1.4% ownership interest in CyrusOne’s 124 million shares. Therefore, utilizing CyrusOne’s closing stock price on September 28th of $77.57 per share, JANA’s position has a valuation of ~$134m.

Perspective From Data Center Peers – Digital Realty, QTS

Digital Realty

Digital Realty has long been a consideration as a potential acquirer for the CyrusOne data center business. Indeed, this notion is relevant because of Digital Realty’s acquisitive nature, as well as the similar operating profiles and customers of both CyrusOne and Digital Realty.

However, in late July 2021, Bill Stein, Digital Realty’s CEO, referenced the company’s lack of interest in a potential acquisition of CyrusOne, on the company’s Q2 2021 earnings call. Specifically, Bill Stein stated “As it relates to the CyrusOne situation… it gives us more of what we already have. And so I just don’t think that’s something that would be of interest to us”.

QTS Realty and Private Equity

In June 2021, Blackstone’s acquisition of QTS Realty Trust for an enterprise value of ~$10bn showcased the appetite of private equity investors for data centers. Indeed, Blackstone’s valuation of QTS at ~26x 2021E EV/EBITDA represents a meaningful premium to CyrusOne’s recent trading range of 22x to 23x 2021E EV/EBITDA.

Similar to QTS, private equity ownership may be a logical choice for CyrusOne due to its near-term strategic initiatives including a i) significant $400m+ development pipeline, ii) capital recycling (i.e., asset sales) worth $1bn to $2bn in asset value, and iii) geographic expansion plans in Europe and Asia-Pacific.

Overall, many of these corporate actions would potentially hinder near-term earnings per share metrics. Indeed, this would not be ideal for CyrusOne, in a public markets setting. For example, dilutive asset sale proceeds will likely fund the company’s initially non-income generating development pipeline.

Prior Reports of Sale, Strategic Alternatives – CyrusOne Data Centers

Data center operator CyrusOne has previously been referenced as being for sale or as evaluating the potential of strategic alternatives. In mid-2019, CyrusOne was named in press reports from Bloomberg stating that it was exploring a potential sale. However, at this prior time, no transaction was ultimately announced.

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