Starboard Value Acquisition Corp (NASDAQ: SVAC), a special purpose acquisition company (SPAC), today released its PRER14A filing, ahead of its special meeting for stockholders, to approve its $3.4bn merger with, and IPO of, retail colocation provider Cyxtera Technologies. As part of this filing, Starboard Value Acquisition provides updates on its valuation approach for Cyxtera, recent churn data, and key risk factors to the business. Notably, it appears that Cyxtera, just this month, shuttered its Moses Lake, Washington data center and exited the market.

Colocation Operational and Business Metrics – Cyxtera Technologies

Cyxtera operates 61 data centers, representing 245 megawatts of power capacity in North America, Europe, and Asia. Recurring and non-recurring revenues, bookings, and churn are metrics that Cyxtera uses to manage and assess its retail colocation business:

Cyxtera Key Operational and Business Metrics Q1 2021

As of Q1 2021, Cyxtera’s $1.8m of churn, equates to $7.2m on an annualized basis. Indeed, this run-rate churn represents the highest level of churn that the company has experienced over the past three years.

Starboard Value Acquisition – Financial Analysis on Cyxtera Technologies

As part of its IPO valuation of Cyxtera Technologies, Starboard Value Acquisition performed a comparable company analysis of certain publicly-traded companies, with a particular focus on U.S. and international data center companies. Starboard Value Acquisition’s management team selected what it deemed as the most comparable companies to Cyxtera’s retail colocation business, including:

  • U.S. Peers: CoreSite Realty (NYSE: COR), CyrusOne (NASDAQ: CONE), Digital Realty Trust (NYSE: DLR), Equinix (NASDAQ: EQIX), QTS Realty Trust (NYSE: QTS), and Switch (NYSE: SWCH)
  • International Peers: Chindata Group (NASDAQ: CD), GDS Holdings (HKG: 9698), NEXTDC (ASX: NXT)

Overall, Starboard notes that these companies traded at an average EV / 2021E EBITDA multiple of greater than 20.0x.

Relative Valuation Comparison

Recall that Starboard Value Acquisition and Cyxtera Technologies agreed to a transaction at an enterprise value of $3.425bn. Indeed, this valuation equates to 15.9x Cyxtera’s 2020A adjusted EBITDA of $215.6m and 15.6x Cyxtera’s 2021E adjusted EBITDA of $220.0m.

Starboard’s IPO valuation of Cyxtera appears attractive relative to other publicly-traded data center companies. However, the company discloses a number of key risks factors in its proxy materials, certain of which are noted below.

Risk Factors – Cyxtera Technologies

Customer Concentration

During 2020, Cyxtera’s largest customer, Lumen Technologies (formerly CenturyLink), accounted for 14% of the company’s revenue. Additionally, at year-end 2020, Cyxtera’s top 20 and top 50 largest customers comprised 42% and 57% of recurring revenue, respectively.

Leased vs. Owned Facilities

Out of its total of 61 data centers, Cyxtera only owns two of its facilities and leases its remaining 59 data centers, relying on third-party landlords. For example, Cyxtera leases 17 locations from Digital Realty, with a weighted average remaining lease term of 11.1 years. In aggregate, Cyxtera pays Digital Realty $68.6m per year, equivalent to 2.1% of Digital Realty’s annual recurring revenue.

Overall, a risk exists that Cyxtera may be forced to vacate specific data centers at the end of a lease term. In turn, this would be disruptive to Cyxtera’s colocation business.

As of Q1 2021, Cyxtera’s data center leases had an average remaining lease duration of ~21 years. This metric assumes the exercise of all extension options exercisable by Cyxtera, in its discretion. Notably, two of Cyxtera’s leased facilities have a lease term expiring in less than five years. Additionally, three leased facilities have lease terms expiring in less than 10 years.

Moses Lake, Washington – Ceasing Operations

In February 2021, Cyxtera notified the landlord of its Moses Lake, Washington data center, that it would cease using the space by the end of June 2021. As part of breaking its lease obligation at Moses Lake, Cyxtera intends to recognize a charge between $57m and $62m. Furthermore, Cyxtera’s management does not believe it will be able to sub-lease the property.

Cyxtera previously noted that Moses Lake had an initial 5 megawatts of power capacity. Moreover, the company stated that Moses Lake would ultimately support up to 80 megawatts of IT load. However, it now appears that Cyxtera’s Moses Lake colocation facility has been closed and removed from the company’s website.

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