Digital Realty (NYSE: DLR) today announced that it has agreed to acquire a 55% equity interest in Teraco Data Environments, a carrier-neutral colocation data center operator in South Africa, from a consortium of investors including private equity firms Berkshire Partners and Permira, for consideration of $1.7bn, which implies an enterprise value for 100% of Teraco of $3.5bn.

Post-closing, Teraco’s existing investors will own the remaining 45% equity interest in the company as they are rolling forward a portion of their equity interests. Specifically, these investors include management, Berkshire Partners, Permira, van Rooyen Group, Columbia Capital, Stepstone Ventures, and the Teraco Connect Trust.

Overall, at Teraco’s $3.5bn valuation, Digital Realty is pricing the company at a ~3.5% cap rate on projected 2022 cash net operating income (NOI) of ~$121m. Additionally, Digital Realty notes that its stabilized return on the Teraco investment will improve over time, as Teraco’s in-service portfolio is leased-up, as well as when its existing development pipeline and land bank are built-out.

Finally, the transaction is expected to close in the first-half of 2022.

Transaction Overview – Teraco Data Environments Combines with Digital Realty

Teraco Data Environments operates 7 data centers located in South Africa’s metros of Johannesburg, Cape Town, and Durban. Particularly, the company’s portfolio comprises 187 megawatts of total planned capacity, including:

  • 7 in-service facilities totaling 75 megawatts of critical power load
  • 1 development project totaling 19 megawatts of critical power load currently under construction
Data Center CampusFacilityCityPowersqftsqm
IsandoJB1 + JB3Johannesburg40.0215k20.0k
BredellJB2Johannesburg13.065k6.0k
TeleportTeleportJohannesburg
RondeboschCT1Cape Town3.027k2.5k
BrackenfellCT2Cape Town18.086k8.0k
Riverhorse ValleyDB1Durban1.016k1.5k
Subtotal – In-Service75.0409k38.0k
EkurhuleniJB4 – #IJohannesburg19.086k8.0k
Total – incl. Construction94.0495k46.0k
Note: Power = critical power load in megawatts, sqft = white space

Notably, Phase I of Teraco’s Ekurhuleni data center campus, known as JB4, will be ready for service in Q1 2022.

Expansion Capacity

Beyond Teraco’s in-service capacity and ongoing development project, the company owns land adjacent to its Johannesburg and Cape Town campuses that will support further development. Specifically, Teraco is able to construct up to 93 megawatts of additional capacity in Johannesburg and Cape Town.

As an example, Phase II of Teraco’s Ekurhuleni / JB4 campus will comprise another 19 megawatts of critical power load across 86.1k sqft (8.0k sqm).

Interconnection

Teraco’s data centers facilitate ~22k interconnections between customers. Of this total, the Isando campus in Johannesburg has 13.0k+ cross-connects (~59% of total).

Also, Teraco owns Africa’s largest and fastest-growing internet exchange point (IXP), NAPAfrica. Direct access to NAPAfrica can be obtained via Teraco’s Isando Campus (JB1 + JB3).

Finally, Teraco hosts 7 on-ramps to cloud service providers in Johannesburg and Cape Town.

Subsea Cables

Teraco’s data centers provide direct access to 7 subsea cables in Durban on the east coast and Cape Town on the southwest coast of South Africa. Additionally, three new subsea cables circling Africa, such as the 2Africa subsea cable, are expected to land in South Africa over the next three years.

Customers

Teraco serves 600+ customers, including 275+ connectivity providers, 25+ cloud and content platforms, and ~300 enterprises. Additionally, Teraco’s key customers include managed service providers and financial services companies.

Management

Post-transaction, Teraco’s management team will remain in-place and will maintain day-to-day responsibility for Digital Realty’s operations in South Africa. Indeed, the company will continue to be led by Jan Hnizdo as Chief Executive Officer.

Transaction Rationale – Digital Realty

Digital Realty’s acquisition of Teraco in South Africa materially scales its existing foothold presence in the African countries of Nigeria, Kenya, and Mozambique. To-date, Dgtl Infra estimates that Digital Realty has invested less than $50m across these African connectivity hubs – making its acquisition of a majority stake in Teraco a significant strategic shift.

To this end, less than three months ago, Digital Realty referred to its ambitions in Africa as only a “$500 million commitment to investment in the continent over the next decade”. As such, Digital Realty’s $1.7bn in consideration for a 55% equity interest in Teraco is a significant acceleration of this previous indication. Perhaps recent unsuccessful attempts to pursue M&A deals with CoreSite and CyrusOne may have pushed Digital Realty in a different strategic direction.

Digital Realty – Existing Presence in Africa

Below are further details on Digital Realty’s existing data center presence in the African countries of Nigeria, Kenya, and Mozambique.

Nigeria and Mozambique

In October 2021, Digital Realty, via a joint venture, acquired Medallion Data Centres, a colocation and interconnection provider in Nigeria for $29m. Additionally, through Digital Realty’s subsidiary iColo, the company commenced a data center development project in Mozambique, which borders South Africa.

Kenya

As of Q3 2021, Digital Realty’s iColo subsidiary operated data center campuses in Kenya’s cities of Nairobi and Mombasa, which together comprised 0.8 megawatts of IT load and 25.8k sqft.

Transaction Structure and Financial Impact – Digital Realty

Below are further details on the transaction structure of the Teraco deal and its financial impact to Digital Realty.

Transaction Structure

Digital Titan Proprietary Limited, a South African subsidiary of Digital Realty’s operating partnership, agreed with TDE Luxco, BPESAL V2 S.a r.l, and other sellers to acquire a 55% interest stake in TDE Investments (Pty) Ltd and its subsidiaries (Teraco).

Put and Call Rights

Teraco’s existing investors, who will own the remaining 45% equity interest in the company, have the ability to put their interests to Digital Realty between 3.5 to 5.5 years after closing. While Digital Realty will have the right to call the equity interests of these minority investors between 5.5 to 6.5 years after closing.

Prior Sale

As a reference point, Berkshire Partners acquired its stake in Teraco, in January 2019, at an enterprise value of $1.0bn, implying an EV/EBITDA multiple of 22.5x.

Financial Impact

Digital Realty expects the acquisition of Teraco to be ~1% dilutive to its core funds from operations (FFO) per share in 2022. Subsequently, the transaction will be breakeven in 2023 and accretive to financial metrics of the combined company thereafter.

Additionally, Digital Realty will finance the acquisition of Teraco through a combination of proceeds from its recent divestitures, capital recycling initiatives, and committed funding under its existing forward equity commitment, amongst other sources. For example, Digital Realty has recently raised proceeds from the following transactions:

Transaction Advisors – Digital Realty, Teraco Data Environments

Digital Realty’s financial advisor was Solomon Partners. Additionally, Digital Realty’s legal advisors were Latham & Watkins and Bowmans.

Teraco’s financial advisor was Goldman Sachs. Additionally, Teraco’s legal advisors were Weil, Gotshal & Manges and ENSafrica.

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