Pan-European colocation provider Telecity has seen their share price surge from 390p to 432p (at the time of writing ) over the past few days with the financial press (see the FT, The Telegraph or The Times) speculating that a bid of 500p from either KDDI, owner of Telehouse or else from the sector giant Equinix is under discussion.
Don’t forget Equinix have only recently acquired their nearest US rival Switch and Data in a deal costing US$689m or £445m, but do see our note on this back in October 2009 when we floated the idea that if Equinix felt able to buy their nearest US competitor why not do the same in Europe?!
Certainly corporate activity in the technology sector in general has recently been given a significant boost following last week’s agreed £2bn takeover of Dimension Data by NTT at a 20% premium to the prevailing share price prior to the announcement. Dimension Data provides networking solutions for corporate LANs and WANs.
At 432p a share Telecity is valued at just over £800m, whilst at $82 per share Equinix is valued at US$3.2bn, or just over £2bn.
What are the implications should a deal arise?
Whilst this is still early speculation it might be worth pondering the implications for the industry; certainly if the stock market truly believed a genuine bid was under discussion the Telecity share price would be quite a bit closer to the suggested 500p takeover price. Conversely though there may also be greater concern here in Europe that the relevant competition authorities might take a firmer position than those in the US took when reviewing the Equinix/Switch and Data deal and if so, this would make a deal much less likely to be allowed through and hence a larger discount to the rumoured offer price might be justified. Indeed a deal might only be possible at the cost of some of the assets being sold in markets where the combined company were felt to have too high a market share and London would be prime example as such. Competition issues would certainly be less of an issue for KDDI though with this combination the concerns would be the effect a carrier owner would have on Telecity’s carrier neutrality, but these worries would be easily dismissed considering how well Telehouse has progressed under KDDI’s ownership to date and certainly Telehouse’s neutrality is never questioned.
However, ignoring the details(!), the key attraction for Equinix of acquiring Telecity would be to access the customer base (remember, about two thirds of these companies’ growth comes from existing customers) and don’t forget our recent note about Telecity’s high customer count. Indeed we have long felt that in acquiring IXEurope Equinix had in fact acquired the wrong operator in Europe as we felt Telecity’s significantly higher customer count offered far greater upside for Equinix’s cross-connect model than IXEurope did as IXE had typically sold quite large deals to fewer clients, with probably their Zurich facility as the exception to this generalisation. The second attraction for Equinix would be able to rapidly expand into new markets where Telecity is already established and these would be Stockholm, Milan and tentatively in Dublin and Manchester, though on this basis perhaps Interxion, who themselves are planning a US listing later this year, might be the better fit as they would offer more new markets for Equinix, being Madrid, Stockholm, Copenhagen, Brussels and Vienna.
Whatever the outcome of the Telecity speculation we continue to believe that the sector will see enhanced corporate activity levels going forward. For example, there are three companies planning US listings later this year, Interxion, Telx and real estate operator Coresite and the management at these companies may well look to use either the effective “currency” listed paper will give them or cash raised to acquire businesses or assets to accelerate their growth plans rather than self build.
Colocation buyers may not be directly affected by all this activity but it is definitely worth being aware of and certainly if consolidation led to a domineering market position by any one operator it could not be considered a healthy market position. Ironically perhaps the bigger operators need the new entrants to help address this risk.