Digital 9 Infrastructure today announced it has completed the acquisition of Aqua Comms, a subsea cable operator, for an enterprise value of $215m. Aqua Comms owns and operates 8.9k miles (14.3k kilometers) of trans-Atlantic and regional subsea cables and is the only independent owner and operator of subsea cables in the North Atlantic.

Aqua Comms Subsea Cables Map
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Digital 9 Infrastructure is buying the company from its current owners Cartesian Capital and the National Treasury Management Agency (NTMA), which is the manager for the Ireland Strategic Investment Fund (ISIF).

Notably, as part of its Initial Public Offering (IPO), Digital 9 Infrastructure did not raise its target initial gross proceeds of £400m. Instead, the group only raised gross proceeds of £300m. Therefore, the Aqua Comms investment comprises 40% of Digital 9 Infrastructure’s Gross Asset Value (GAV).

Additionally, the board of Digital 9 Infrastructure notes that Aqua Ventures Limited (Christopher Bake and Peter Yu) and Black Forest Funding (Orchard Global Asset Management) have been issued a total of 33.0 million ordinary shares at £1.00 per share, equivalent to £33.0m. Indeed, this is to partially and fully pay each entity, respectively, for the acquisition of Aqua Comms.

Financials and Valuation – Aqua Comms and Digital 9 Infrastructure

For year-end 2020, Aqua Comms generated $30.2m of revenue and $18.6m of EBITDA (62% margin). Additionally, in terms of growth, Aqua Comms grew its revenue by 5% and EBITDA by 13%, year-over-year. Overall, based on Aqua Comms’ enterprise value of $215m, Digital 9 Infrastructure is valuing the company at 11.6x EBITDA.

Capital Expenditures

Overall, the subsea cable business is capital-intensive and therefore, Aqua Comms’ revenue and EBITDA growth did not come purely on an organic basis. For full-year 2020, Aqua Comms estimates that it will have spent $23.4m in capital expenditures. Notably, the company’s outlay for 2020 represents a 60% increase in capital expenditures, from the $14.7m it spent during 2019.

Subsea Cables Owned and Operated – Aqua Comms

Aqua Comms is a developer and operator of six distinct subsea cable systems, as shown below:

Subsea Cables Owned and Operated by Aqua Comms
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  • AEC-1: achieved ready for service (RFS) status in 2016 and has six fiber pairs. The subsea cable system extends from a cable landing station (CLS) in Long Island, New York, across 3.4k miles to a corresponding cable landing station in Ireland
  • AEC-2: trans-Atlantic subsea cable connecting key data center hubs in Europe and North America. The subsea cable system spans 4.8k miles between New Jersey and Denmark
  • CC-1: achieved RFS status in 2012 and has 72 fiber pairs. The subsea cable system is 85 miles and provides connectivity across the Irish Sea, connecting Ireland to the United Kingdom and Europe
  • CC-2: expects to achieve RFS status in the first-half of 2021. The subsea cable system will provide diverse connectivity across the Irish Sea, connecting the UK and Ireland
  • NSC (North Sea Connect): expects to achieve RFS status in the first-half of 2021. The subsea cable system will provide connectivity between Newcastle and Denmark

Product Mix and Customers – Aqua Comms

Aqua Comms generates the majority of its revenue from the following three product lines:

  1. Operations and Maintenance (O&M): long-term contracts paid to Aqua Comms for providing operations and maintenance to customers who have purchased indefeasible rights of use (IRUs) on Aqua Comms’ systems
  2. Indefeasible Right of Use (IRU) Sale Contracts: provide access to specified capacity for the life of the system. IRU revenue payments are made for the agreed capacity and based on the life of the system
  3. Capacity Services: lease contracts with customers for under 5 years, with automatic renewal mechanisms built-in

Overall, Aqua Comms has 50 customers which comprise content providers, telecom service providers, and enterprises. Firstly, content providers, which include Facebook, Amazon, Apple, Netflix, Google, and Microsoft, collectively represent 50% of the company’s revenue. Secondly, telecom service providers, such as Vodafone and Orange SA, comprise 44% of Aqua Comms’ revenue. Finally, enterprises make-up the remaining 6% of the company’s revenue.

Subsea Cables – Key Sector for Digital 9 Infrastructure

Subsea cables are the backbone of the internet, transporting 98% of international internet traffic. Currently, there are 400+ subsea cable systems, comprising 745k route miles, active around the world. Additionally, over the next three years there is the possibility of a further 60 new subsea cables being constructed globally.

The process for laying subsea cables can take several years and involves significant capital outlays. For example, a new trans-Atlantic subsea cable can take up to three years to build and costs over $275m to deliver it to an operational stage.

Industry Background – Subsea Cables

Historically, the subsea cable industry was dominated by carriers such as CenturyLink (now Lumen Technologies) and Tata Communications. However, over-the-top (OTT) and content providers such as Amazon, Facebook, and Google have recently become key market participants. This is because of their need for high-bandwidth, low-latency, and high-redundancy communications.

Prior to 2012, content providers accounted for less than 10% of internet traffic. However, by 2019 their share of total capacity usage had risen to 64%. Indeed, by 2027, content providers are anticipated to account for 83% of total internet traffic.

Certain content providers (e.g., Facebook and Google) have built subsea cables independently. However, these content providers continue to partner with subsea cable companies for engineering and operations.

Asset Characteristics – Subsea Cables

Leading subsea cable systems deliver low-latency and high bandwidth, on high-demand routes, with multiple points-of-presence (PoPs). Additionally, subsea cables are long-life assets that produce predictable long-term cash flows from customers. Specifically, these customers enter into 20-year operations and maintenance (O&M) contracts, 20-year Indefeasible Right of Use (IRU) sale contracts and into medium-term recurring leases for capacity.

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