Zayo today announced that it has agreed to sell zColo, which includes 44 data centers, counting 13 key interconnect locations (or “carrier hotels”), in 23 markets across the United States and Europe, to DataBank for ~$1.4bn. After deducting for capital lease and other purchase liability adjustments, zColo’s Enterprise Value is $1.2bn, which equates to 14.2x zColo’s Q2 2020 annualized EBITDA of $86m.

DataBank will own and manage the data centers, in which Zayo will remain a key anchor customer. Furthermore, the companies will collaborate closely. Firstly, DataBank will bring colocation solutions to Zayo’s fiber customers. Secondly, Zayo will offer network connectivity solutions to DataBank’s colocation and cloud customers.

The sale of zColo, which is anticipated to close by year-end 2020, allows Zayo to take a material step in its path to focus on its core Fiber business. For DataBank, this transaction combines the broad collection of zColo’s data centers and network interconnection assets with DataBank’s 20 data centers, 5 key interconnect locations (or “carrier hotels“), in 9 markets, which are focused on Tier-2 cities.

DataBank and zColo - Transaction Rationale

With the acquisition of zColo, DataBank becomes a leading U.S. edge colocation operator for hyperscale, technology and content customers. Furthermore, zColo adds a diverse mix of strategically-important enterprise and interconnect data centers across attractive new markets.

DataBank’s enlarged portfolio will have:

  • 64 data centers in 29 markets (up from 20 data centers and 9 markets)
  • 3.0k+ customers including many Fortune 100 and leading cloud and content providers
  • Annual revenue of over $450m and EBITDA of over $150m
  • 1.2m square feet of data center space
  • 138 MW of power capacity
  • 30k network cross connects
  • 18 major network interconnection points
  • 12 cloud nodes
DataBank and zColo - Combined Footprint

Transaction Summary and Valuation

The transaction is being funded with an equity investment of $720m, by an investor group led by Colony Capital (NYSE: CLNY), DataBank’s controlling shareholder and Nuveen Real Estate. Colony Capital originally invested in DataBank in January 2020, purchasing 20% stake in the company, valued at $185m. The $185m valuation for DataBank equated to 17.6x EBITDA, at the time.

As part of the zColo transaction, Colony Capital is investing an additional $145m from its balance sheet to maintain its 20% ownership stake in DataBank. Overall, this brings Colony Capital’s total investment in DataBank to $330m. The remaining equity investment of $575m for the zColo transaction, will be provided by third-party co-investors. Importantly, this third-party capital adds more fee earning equity under management (FEEUM) for Colony Capital.

Acquisition debt financing of $550m for the transaction is being provided by TD Bank, Truist Financial and Société Générale. Total debt rises to $725m, with the inclusion of capital lease obligations.

DataBank and zColo - Transaction Summary

zColo which was valued at 14.2x EBITDA represents an accretive transaction for Colony Capital’s DataBank investment. Relative to Colony’s initial investment in DataBank, which was valued at 17.6x EBITDA, the zColo multiple is lower.

Publicly-Traded Data Center Comparables

The zColo transaction also compares favorably to publicly-traded data center peer valuations. These include companies like Equinix which trades at 33x 2020E EBITDA, Digital Realty which trades at 26.5x 2020E EBITDA, CyrusOne which trades at 23.5x 2020E EBITDA and CoreSite which trades at 25x 2020E EBITDA. Sign up for our weekly e-mail updates at dgtlinfra.com. Here, you can receive the latest publicly-traded data center peer valuations straight to your inbox every week.

Precedent Data Center Transactions

In terms of precedent data center transactions, the zColo transaction multiple of 14.2x EBITDA also compares favorably. Examples of historical data center M&A during 2020 include the following:

  • April 2020: Macquarie Infrastructure acquired AirTrunk from Goldman Sachs and TPG Capital for $2.1bn, equating to a 31x EBITDA multiple
  • March 2020: Digital Realty acquired Interxion for $8.5bn, equating to a 21.5x EBITDA multiple
  • February 2020: Digital Realty acquired the remaining 49% interest in the Westin Building Exchange, in Seattle. This transaction valuation was $305m, equating to a 18x EBITDA multiple

For our full list of precedent data center transactions, visit our Shop, at dgtlinfra.com/shop. Here, you can get full access to precedent data center transactions dating back to 2015.

Synergies and business optimization initiatives will further enhance the economics of the zColo transaction for DataBank. This will occur in a similar manner to the multiple of DataBank itself. Specifically, DataBank will have its effective EBITDA multiple reduced to <15x EBITDA on a stabilized basis, under Colony Capital’s ownership. See below for Colony’s approach to an accretive acquisition strategy.

DataBank Overview

Connecting the Dots

It is worth noting that Colony Capital (through Digital Colony Partners I) also owns a material interest in Zayo. Indeed, Zayo was taken private in March 2020, alongside EQT Partners, in a $14.3bn transaction ($6.3bn of sponsor equity and $8.0bn of debt). Colony Capital has additional influence over Zayo through its $2.2bn of equity co-investment committed for Zayo. Of this co-invest, $708m is fee-bearing co-invest capital.

Overall, Zayo owns 133k fiber route miles and 13 million fiber strand miles. Additionally, this fiber connects to 35.0k buildings, in the United States and Europe.

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