Switch Inc (NYSE: SWCH) released its Preliminary Proxy Statement (PREM14A) related to its $11bn or $34.25 per share take-private through a merger with entities of DigitalBridge Group and IFM Investors. Below Dgtl Infra summarizes notable events and key takeaways regarding the background and process whereby DigitalBridge and IFM acquire Switch Inc through a merger, as well as competition from Brookfield (Bidder A), amongst other interested bidders.

Overall, DigitalBridge and IFM indicate that they will finance the acquisition of Switch Inc with a combination of $4.825bn of equity and $5.795bn of debt, implying a total transaction value of $10.62bn. Of the total $4.825bn equity commitment, DigitalBridge has committed to contribute $2.895bn (60%), while IFM has pledged to provide $1.93bn (40%), simultaneously with the closing of the Switch Inc merger.

Preface to the Merger – Shareholder Value Initiatives

In late 2021, prior to considering any strategic transaction, Switch Inc undertook a number of shareholder value initiatives, including engaging with activist hedge fund Elliott Management:

  • August 5, 2021: Elliott Investment Management takes an 11% economic interest in Switch’s Class A shares. Concurrently, Switch’s board announces the establishment of a real estate investment trust (REIT) committee of the board to evaluate whether a REIT conversion would enhance long-term shareholder value
  • November 4, 2021: Switch announces that its board has unanimously determined to pursue a REIT conversion, targeting completion of the conversion by January 1, 2023. In turn, Switch would make a REIT tax election for the 2023 tax year
  • November 15, 2021: Switch hosts its Investor Day, presenting its vision and long-term strategy for the company

Background of the Merger – DigitalBridge Acquires Switch Inc

As part of the merger process description below, DigitalBridge, IFM, and Switch Inc’s representatives include the following:

  • DigitalBridge / IFM: legal advisor was Simpson Thacher & Bartlett
  • Switch Inc: financial advisors were Goldman Sachs and Morgan Stanley. Also, Switch’s legal advisor was Latham & Watkins

Additionally, the other main competitive bidder in the Switch process, identified as Bidder A, was named multiple times in press reports as Brookfield Asset Management.

Special Committee Formed and Financial Advisors Engaged

  • December 16, 2021: Switch’s board forms a special committee for the purposes of considering, evaluating, negotiating, and making recommendations to the board for or against any strategic transaction. Initially, the members of the special committee were Don Snyder (chair), Jason Genrich, Kim Sheehy, and Bryan Wolf. However, on February 14, 2022, Liane Pelletier replaced Don Snyder as a member of the special committee, while Bryan Wolf was elected as the chair of the special committee
  • December 16, 2021: Switch’s special committee instructs the board of directors to engage Goldman Sachs and Morgan Stanley as financial advisors to the special committee in connection with exploring strategic alternatives
  • Throughout December 2021 and January 2022: Goldman Sachs and Morgan Stanley contact 16 potential bidders, including each of DigitalBridge, IFM Investors, Bidder A, and Bidder B to inquire about their interest in entering into a strategic transaction with Switch

NDAs Executed and Process Letter Distributed

  • Early February 2022: Latham & Watkins, Switch’s legal advisor, negotiates and Switch enters into non-disclosure agreements (NDAs) with 9 potential bidders, including: DigitalBridge (February 8th), IFM (February 9th), Bidder A (February 4th), and Bidder B (February 3rd). Subsequently, during the first several weeks of February 2022, each of the bidders attend separate in-person management presentations with Switch
  • February 22, 2022: Goldman Sachs and Morgan Stanley send a process letter to the 9 potential bidders, including DigitalBridge, IFM, Bidder A, and Bidder B, requesting that interested bidders submit initial indicative offers by March 10, 2022
  • March 2022: two additional bidders execute NDAs, enlarging the process to a total of 11 potential bidders
  • Upon Execution of NDAs: each of the 11 bidders receive access to a virtual data room enabling them to conduct due diligence on Switch. Additionally, Goldman Sachs and Morgan Stanley coordinate responses by Switch’s management to various diligence questions posed by the bidders

Indicative Offers Received

On March 10, 2022, Switch receives indicative offers from 4 of the 11 potential bidders:

  • DigitalBridge proposes to acquire Switch for $34.00 per share
  • IFM did not submit a per share price but indicates they are willing to invest up to $2.5bn
  • Bidder A proposes to acquire Switch for $32.50 per share
  • Bidder B proposes to acquire Switch at a range of $28.00 to $31.00 per share

Due Diligence Progresses and Sale Process Leaks

  • Late March through mid-April 2022: Switch’s management and the board hold in-person meetings with DigitalBridge, IFM, Bidder A, and Bidder B, and their respective advisors, including tours of Switch’s data center campuses. Additionally, diligence calls are held with each potential bidder, and the virtual data room is populated in response to diligence requests
  • March 21, 2022: press reports indicate that Switch “is exploring strategic options including a sale”

Second Round Begins

  • March 30, 2022: DigitalBridge requests through the special committee’s financial advisors that DigitalBridge and IFM be permitted to submit a joint bid at the next deadline. On April 1, 2022, Switch approves the request for submission of this joint bid
  • April 5, 2022: Goldman Sachs and Morgan Stanley provide a second round process letter to DigitalBridge / IFM, Bidder A, and Bidder B. Additionally, Latham & Watkins uploads an initial draft merger agreement to a virtual data room for review by the bidders
  • Initially, the process letter directs bidders to provide a final bid by no later than April 28, 2022. However, the special committee subsequently pushes the date for final bids back to May 5, 2022 (i.e., one week later), in order to allow bidders additional time to finalize their proposals, including their debt financing packages

Second Round Developments

  • April 15, 2022: Latham & Watkins receives revised merger agreement drafts from each of DigitalBridge / IFM and Bidder A
  • April 20, 2022: Switch’s special committee directs Latham & Watkins to negotiate the merger agreement drafts with legal counsel to DigitalBridge / IFM, Simpson Thacher & Bartlett, and with legal counsel for Bidder A
  • April 21st through May 5th, 2022: Switch’s management and Latham & Watkins hold diligence calls with DigitalBridge / IFM and Bidder A regarding diligence related to financing real estate, benefits, intellectual property, tax, and regulatory matters
  • May 2, 2022: press reports indicate that “Brookfield Asset Management Inc. is exploring a takeover of data-center operator Switch Inc”
  • May 4, 2022: Bidder B informs Morgan Stanley that it will not submit a revised bid to acquire Switch

Revised Bid Submissions

On May 5, 2022, Switch receives revised bids from both DigitalBridge / IFM and Bidder A, along with revised drafts of the merger agreement and financing documents:

  • DigitalBridge / IFM proposes to acquire Switch for $34.25 per share, a $0.25 per share increase from DigitalBridge’s indicative offer
  • Bidder A proposes to acquire Switch for $29.00 per share, a $3.50 per share decrease from Bidder A’s indicative offer. Furthermore, Bidder A communicates that this reduction in its bid reflects a change in market conditions that impacted financing costs

Notably, each bidder’s offer letter requests that Rob Roy and Thomas Morton exchange an aggregate of ~$500m of equity as part of the transaction.

Penultimate Negotiations

  • May 7, 2022: Latham & Watkins sends revised drafts of all transaction documents back to Simpson Thacher & Bartlett, legal counsel to DigitalBridge / IFM, as well as Bidder A’s legal advisor
  • May 8, 2022: Goldman Sachs and Morgan Stanley inform the special committee that Bidder A has increased its offer price to $30.00 per share, a $1.00 per share increase from Bidder A’s prior offer. Also, the special committee authorizes Goldman Sachs and Morgan Stanley to communicate to each bidder to improve its bid price in order to finalize a transaction
  • May 9, 2022: Goldman Sachs and Morgan Stanley inform the special committee that Bidder A has agreed to increase its offer price (again) to $32.50 per share, a $2.50 per share increase from Bidder A’s offer the day before, while Bidder A conditioned this price on signing the transaction by the end of day
  • Whereas DigitalBridge / IFM agree to make improvements to the terms of their financing package and the draft merger agreement to improve closing certainty. However, DigitalBridge / IFM do not increase their offer price from their prior bid
  • May 9, 2022: press reports indicate that “DigitalBridge is vying against an arm of Brookfield Asset Management Inc. for Las Vegas-based Switch”

Best and Final Offers

  • May 9, 2022: Goldman Sachs and Morgan Stanley inform each bidder that they should provide a best and final offer by the following morning, which should include an increase in offer price
  • May 10, 2022: Bidder A informs Morgan Stanley that it is unwilling to increase its offer price beyond $32.50 per share and that it will not negotiate further for the purchase of Switch at a higher price
  • Later in the Day on May 10, 2022: Goldman Sachs and Morgan Stanley convey to DigitalBridge and IFM that Switch was interested in executing definitive documentation for a transaction with them. But they also state that DigitalBridge / IFM should increase their offer by an additional $0.25 per share in order to secure the transaction
  • Early Evening on May 10, 2022: DigitalBridge / IFM communicate that $34.25 per share was their best and final offer price

Switch Inc Selects DigitalBridge and IFM as its Merger Partners

  • Late Evening on May 10, 2022: Switch’s executive management and special committee recommend that the board approve the transaction as proposed by DigitalBridge / IFM. Subsequently, the board unanimously i) determines that the merger agreement and its transactions are in the best interests of Switch, ii) directs that the mergers be submitted for consideration at a special meeting of Switch’s stockholders, and iii) recommends that Switch’s stockholders approve the merger
  • Pre-Market Open on May 11, 2022: Latham & Watkins and Simpson Thacher & Bartlett finalize all transaction documents. Subsequently, Switch Inc and DigitalBridge / IFM execute the merger agreement
  • Early Morning on May 11, 2022: DigitalBridge / IFM and Switch issue a joint press release announcing their entry into the merger agreement

Merger Process In-Depth – Read More

Want to read more from our “Merger Process In-Depth” series? Check-out our coverage on the merger processes for the following digital infrastructure deals:

  1. KKR and GIP’s $15bn take-private of CyrusOne
  2. American Tower’s $10.1bn purchase of CoreSite Realty
  3. Blackstone’s $10bn deal for QTS Realty
  4. DigitalBridge’s $1.1bn pursuit of Landmark Infrastructure
  5. Cyxtera’s $3.4bn combination with Starboard Value
  6. DigitalBridge’s $854m take-private of Boingo Wireless

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