Cyxtera Technologies, a retail colocation and interconnection data center provider, and Starboard Value Acquisition Corp. (NASDAQ: SVAC), a publicly traded special purpose acquisition company, today announced the signing of a definitive business combination agreement.

Cyxtera Technologies – Overview

Cyxtera was formed through the 2017 carve-out of CenturyLink’s (now Lumen Technologies) data center and colocation business. Specifically, Cyxtera operates 61 data centers, representing 245 megawatts of power capacity, which have a 67% utilization rate. Collectively, these data centers comprise 1.9 million sqft, in North America, Europe, and Asia, supporting over 2.3k+ customers.

Cyxtera Comparison to Public Data Center Peers

Within its data centers, Cyxtera has 40k cross-connects and 240+ network service providers. Indeed, this demonstrates Cyxtera’s interconnection focus, given the company has an average of 17 network service providers in each of its data centers.

Notably, Cyxtera will become the third largest publicly-traded global provider of retail colocation and interconnection services. In 2020, Cyxtera generated revenues of $690m and Adjusted EBITDA of $213m. Importantly, the company’s interconnection revenue comprises 10% of its total revenue.

Starboard Value Acquisition Corp. – Overview

Starboard Value Acquisition Corp. is a $404m blank check company backed by Starboard Value LP, a New York-based private equity firm, with $6.7bn of assets under management (AUM). In terms of personnel, Starboard Value’s Chief Executive Officer Jeff Smith is the Chairman of Starboard Value Acquisition Corp., and Starboard Value’s Managing Director MJ McNulty is the Chief Executive Officer of Starboard Value Acquisition Corp.

Transaction Overview – Cyxtera Technologies and Starboard Value Acquisition

Cyxtera Technologies and Starboard Value Acquisition Corp’s merger implies an enterprise value of $3.4bn, for the data center business. Indeed, this valuation equates to 16.1x Cyxtera’s 2020E Adjusted EBITDA of $213m and 15.6x Cyxtera’s 2021E Adjusted EBITDA of $220m. Notably, in November 2016, BC Partners and Medina Capital purchased Cyxtera from CenturyLink for $2.3bn, equating to a multiple of only 9.6x EBITDA, at the time.

Cyxtera and Starboard Value Acquisition Projected Financial Performance

The current owners of Cyxtera, BC Partners and Medina Capital, will roll $1.1bn, equivalent to 100% of their current equity stake, into the merged company. Therefore, upon completion of the transaction, BC Partners and Medina Capital will retain 58% ownership of the combined company. Based on the valuation and capitalization of Cyxtera, the company will have a post-deal equity value of $1.8bn.

Overall, the combined data center company will change its name from Starboard Value Acquisition Corp. to Cyxtera Technologies, Inc. The business combination is expected to close in mid-2021. At this point, the company will list its common stock on the Nasdaq stock market under the symbol CYXT.

Sources of Proceeds

In aggregate, Cyxtera Technologies will receive $654m of proceeds. Firstly, these cash sources comprise a $250m concurrent private placement of common stock of Starboard Value Acquisition Corp. (known as a PIPE), priced at $10.00 per share. Indeed, Limited Partners (LPs) of Starboard have committed $60m of the $250m PIPE funding and Fidelity Management has made a separate commitment. Secondly, the remaining cash sources include $404m of Starboard Value Acquisition Corp. cash.

Notably, Starboard’s Limited Partners (LPs) have entered into a $100m forward equity purchase agreement. This agreement is in-place to offset redemptions from any public shareholders of Starboard Value Acquisition Corp., should they exercise their redemption rights.

Use of Proceeds

The majority of the proceeds that Cyxtera Technologies receives will be used to retire company debt, much of which is high-cost financing. Specifically, $453m of cash (62% of total proceeds) will be used to repay two tranches of existing debt at the company. Firstly, Cyxtera will retire all $310m of its high-cost LIBOR + 725 bps second-lien debt, which matures in 2025. Secondly, the company will repay all $143m of its drawn revolver, which has a cost of LIBOR + 300 bps.

Overall, Starboard Value Acquisition Corp’s merger with and PIPE funding of the data center business of Cyxtera Technologies, is a significant deleveraging event for the company, which has been perennially over-levered. Specifically, post-completion, this transaction enables the company to reduce its:

  • Net Leverage from 10.4x to 7.6x, on 2020E Adjusted EBITDA of $213m
  • Contractual Net Leverage from 9.8x to 6.9x, on 2020E Adjusted EBITDA of $213m
  • Financial Net Leverage (which excludes capital lease obligations) from 5.9x to 3.1x, on 2020E Adjusted EBITDA of $213m

As a reference point, Cyxtera’s leverage levels pre-transaction were well in excess of the metrics from its closest publicly-traded data center peers. Specifically, Equinix currently operates with Net Debt / EBITDA of only 3.3x, and CoreSite Realty runs its business with Net Debt / EBITDA of 5.2x. Therefore, even post-deleveraging, Cyxtera will operate with the highest leverage ratio amongst its publicly-traded data center peer group.

Governance

Cyxtera Technologies’ initial board of directors will include the following individuals:

  • Manuel Medina (Chairman)
  • Nelson Fonseca (Chief Executive Officer)
  • Greg Waters (Lead Independent Director)
  • Jeff Smith (from Starboard Value Acquisition Corp., Starboard Value LP)
  • Raymond Svider (from BC Partners)
  • Fahim Ahmed (from BC Partners)

Notably, three additional independent directors will be added to the board of directors over time.

Transaction Rationale – Cyxtera Technologies and Starboard Value Acquisition

Starboard Value Acquisition Corp. highlights three key points of rationale for why it is acquiring Cyxtera Technologies.

Secular Industry Tailwinds

Firstly, the mission critical nature of digital infrastructure has gained unprecedented importance, which has been heightened through the COVID-19 pandemic. Indeed, industry trends support strong and continued growth for Cyxtera’s customers. Specifically, the company will benefit as enterprises, service providers, and the Federal sector execute their digital transformations.

Access to Capital Fuels Growth

Secondly, the carve-out of CenturyLink (from the 2016 acquisition) needed to be completed to fully realize Cyxtera’s platform potential. BC Partners and Medina Capital have made capital investments into the sales and operations functions of Cyxtera, in addition to significantly increasing the company’s sellable capacity. In turn, the business has recently begun executing on its revenue growth and margin expansion opportunities. Fresh capital from Starboard Value Acquisition Corp. will continue to accelerate Cyxtera’s growth trajectory.

Leadership Team and Financial Sponsors

Thirdly, there exists the potential to deploy incremental capital at very high return on investment (ROI) across Cyxtera’s footprint. Importantly, more than 70% of Cyxtera’s capital expenditures (excluding Lumen Technologies) have been success-based, premised on expansion, installation, and enhancements.

Moreover, Cyxtera is now better positioned financially for future industry consolidation through M&A. Notably, there have been $59bn of strategic colocation M&A in the sector since 2012.

Transaction Advisors – Cyxtera Technologies and Starboard Value Acquisition

Citigroup served as lead financial advisor to Cyxtera. Additionally, Morgan Stanley served as financial advisor to Cyxtera, and J.P. Morgan served as financial advisor to Cyxtera and BC Partners. Finally, Latham & Watkins served as legal advisor to Cyxtera and BC Partners.

UBS, Stifel, Nicolaus, and Cowen served as capital markets advisors to Starboard Value Acquisition Corp. Additionally, Akin Gump Strauss Hauer & Feld served as legal advisor to Starboard Value Acquisition Corp. Finally, Hughes Hubbard & Reed served as legal advisor to Starboard Value LP.

Data Centers – Precedent M&A Transactions

Below we highlight three notable data center precedent M&A transactions that the Cyxtera Technologies and Starboard Value Acquisition deal is comparable to. Recall that Starboard Value Acquisition Corp. is valuing Cyxtera at an enterprise value of $3.4bn, which equates to 16.1x Cyxtera’s 2020E Adjusted EBITDA of $213m.

DataBank Acquires zColo

Firstly, in September 2020, DataBank acquired 44 data centers in the United States and Europe from Zayo Group, for $1.2bn. Indeed, this data center business, known as zColo, comprised a total of 84 megawatts of power capacity and 778k sqft, which was sold at an EBITDA multiple of 14.2x.

Equinix Acquires Bell Canada Data Centers

Secondly, in June 2020, Equinix acquired 13 data centers in Canada from Bell Canada, for $1.0bn Canadian dollars ($780m USD). Indeed, these data centers comprised a total of 1.2 million sqft and were sold at an EBITDA multiple of 15.0x.

Digital Realty Sells Cyxtera Portfolio to Mapletree Investments

Thirdly, in September 2019, Digital Realty agreed to sell Mapletree Investments a portfolio of 10 powered-shell data centers, which is relevant because they were all occupied by Cyxtera. Note that retail colocation providers like Cyxtera, typically lease some or all of their data center space from wholesale providers like Digital Realty.

Therefore, the look-through tenant on these data center assets was Cyxtera, as opposed to only Digital Realty as a counterparty. The total consideration for solely the Cyxtera occupied assets was $557m, which implied an EBITDA multiple of 15.2x.

Key Takeaways

In summary, the 16.1x EBITDA multiple paid for Cyxtera, appears to be 1.0x to 2.0x more expensive than comparable transactions announced in the past 12 to 18 months. For further comparable transactions, check out our comprehensive list of data center precedent M&A transactions here.

Cyxtera Technologies – Customers and Business Model

Beyond the transaction with Starboard Value Acquisition Corp., we highlight additional notable details about Cyxtera’s customers and business model.

Customers

Cyxtera’s largest customer is Lumen Technologies, which comprises 13% of the company’s total revenue. Indeed, Lumen Technologies signed a new 5-year agreement with Cyxtera in 2020. Overall, Cyxtera’s top 20 customers comprise 42% of the company’s total revenue and have a weighted average lease term of 13.4 years (excluding Lumen Technologies).

Additionally, the company serves a variety of enterprises, service providers, and government agencies. For example, these customers include Capgemini, Cognizant, Cloudflare, Fujitsu, HPE, Nvidia, and Zenlayer.

During 2020, Cyxtera generated $23.4m of customer bookings and experienced average monthly core churn (excluding Lumen Technologies) at 0.8% of monthly recurring revenue (MRR).

Business Model

Cyxtera Business Model Comparison to Public Data Center Peers

Firstly, referring to the Wholesale / Hyperscale column, the wholesale data center providers lease an entire data center to a single tenant. Differentiation in this model is about how efficiently a data center is built, which means that there is very little interconnection involved, which is not a focus of Cyxtera.

Secondly, referring to the Managed Services column, these companies provide comprehensive IT solutions, including hardware, software, and labor. Although this is a sector that Cyxtera understands well, the company does not provide managed services to its customers. Instead, Cyxtera uses managed services providers as one of its partners. This is because managed services providers need the digital infrastructure that Cyxtera provides, to deliver IT solutions to their customers.

Finally, referring to the Retail / Interconnection column. This the company’s focus in the data center sector and the area that Cyxtera projects is best positioned for accelerated growth. Retail colocation data centers operate as marketplaces, serving multiple enterprise and service provider customers per facility. These customers leverage interconnection solutions to connect with one another, creating an ecosystem where companies can easily connect to their business partners.

Key Takeaways

Overall, Cyxtera highlights the positive aspects of the retail colocation and interconnection business model. However, one of the key areas of focus for many infrastructure funds and private equity investors is contract length, which Cyxtera shows as 3 to 5 years for Retail / Interconnection. Importantly, this contract length is materially shorter than the contract lengths of 10 to 15 years, which are more commonplace in the Wholesale / Hyperscale data center segment.

Moreover, Cyxtera also does not highlight that the tenants signing these long-term leases for Wholesale / Hyperscale data centers have a much higher propensity to be investment grade tenants than in the Retail / Interconnection data center segment. As a result of both contract length and investment grade tenant composition, Cyxtera likely attracted significantly less interest from potential buyers at infrastructure funds and private equity firms.

Data Center Coverage by Market

Cyxtera Data Center Coverage by Market

Cyxtera has broad geographic coverage, being located in every major Tier 1 North American market. Importantly, the company is located in the top 10 global data center markets. Indeed, Cyxtera has a significant presence in fast-growing international markets like London, Amsterdam, Frankfurt, and Singapore. In turn, this global portfolio allows Cyxtera to provide customers with multiple deployment options. For example, these include support for business continuity and disaster recovery requirements.

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