Consolidation in the data center market, which had already been well underway for the past several years, accelerated this month when two of the top four providers announced they were being acquired for a total of $25 billion.
CyrusOne, the world’s third-largest U.S. data center operator, is being bought by investment firms KKR and Global Infrastructure Partners (GIP) for $15 billion in the largest deal in the fast-moving market. CyrusOne, which has been listed on the NASDAQ since 2013, will go private once the deal closes.
At the same time, CoreSite – number four in the United States – is being bought for $10.1 billion by American Tower, a real estate investment trust (REIT) making its first significant foray into the data center market.
In addition to providing companies with data center, cloud, colocation and disaster recovery solutions and services, data center providers also partner with carriers, managed services providers, cloud migration services providers and others, placing them at the heart of the channel services market.
At a time when cloud investments and remote work are boosting data center company fortunes, they’re becoming increasingly attractive to private equity and real estate trusts.
Data Center Consolidation Gains Steam
The deals come months after the fifth- and the sixth-largest data center operators – QTS and Cyxtera – also were bought. Asset manager Blackstone bought QTS for $10 billion, setting a record that will be eclipsed when the CyrusOne deal closes.
The latest acquisitions added fuel to what already has been a fast-growing acquisition trend in the data center market. According to analysts at Synergy Research Group, as of mid-November, the total number of deals that had closed had already exceeded the record number that were completed last year. In addition, while the total value of the deals so far hadn’t reached the level of 2020, the CoreSite acquisition – which is expected to close by the end of the year – could push the overall value of deals to 16 percent higher than last year.
There also are several other acquisitions that have been agreed to but have yet to close, according to Synergy. Completion of any of those deals would push the overall tally for 2021 even higher.
The CyrusOne deal is expected to close in the second quarter of 2022.
Cloud Adoption Fuels the Trend
Driving the rapidly increasing data center consolidation trend has been the growing enterprise adoption of the cloud and the rise of massive data center operators like Google, Microsoft, Amazon and Facebook, according to John Dinsdale, chief analyst at Synergy. This has been fueling not just data center companies to buy others in the market but also attracting more outside investment.
“Hyperscale operators continue to aggressively expand their operations, while both enterprise- and consumer-oriented cloud markets keep on growing rapidly,” Dinsdale said in a statement. “This is driving an ever-increasing need for data center capacity. The level of data center investment required is too much for even the biggest data center operators, causing an influx of new money from external investors.”
He noted that “in quick succession, ownership of four of the top six U.S. data center operators has changed hands, while the two biggest names in the industry – Equinix and Digital Realty – are increasingly turning to joint ventures to help fund their growth. Over the last 18 months, there has been a very notable shift in buyers with private equity investors becoming a lot more active than data center operators.”
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Deals Worth Billions
Included among the other large acquisitions are Digital Realty’s $8.4 billion purchase of Interxion in 2019 and its $7.6 billion deal for DuPont Fabros two years earlier, and China’s Jiangsu Shagang Group deal for Global Switch in 2019 that was valued at more than $8 billion. Jiangsu Shagang Group reportedly earlier this year was putting Global Switch on the market for $11 billion.
CyrusOne and CoreSite were attractive targets because of their large data center footprint and their broad reach within the U.S. market, according to Synergy.
CyrusOne has more than 50 enterprise-class data centers and colocation facilities on three continents, more than 40 million square feet of rentable space and more than 1,000 customers, according to the company. Those customers include 200 of the Fortune 1,000, who leverage such services as colocation, hyperscale and build-to-suit environments.
For its part, CoreSite has 25 data centers and 21 cloud on-ramps, along with more than 32,000 connections in eight major U.S. markets, including Silicon Valley, Los Angeles, Boston, New York and Northern Virginia. The company has partnerships with such cloud providers as Amazon Web Services (AWS), Microsoft Azure, Google Cloud, IBM Cloud, Oracle Cloud, Alibaba Cloud and VMware.
CoreSite has more than 1,370 customers, including enterprises, network operators, cloud providers and service providers.
“We are in the early stages of a cloud-based, connected and globally distributed digital transformation that will evolve over the next decade and beyond.” American Tower CEO Tom Bartlett said in a statement, adding that his company’s distributed real estate portfolio and CoreSite’s data center position will help American Tower become a leader in a 5G-centric world. “As the convergence of wireless and wireline networks accelerates and classes of communications infrastructure further align, we anticipate the emergence of attractive value creation opportunities within the digital infrastructure ecosystem.”
Also read: MSP Survey Reveals Competitive Challenges in Cloud Era
Remote Work on the Rise
Roger Kay, principal analyst with Endpoint Technologies Associates, told Channel Insider that the COVID-19 pandemic – particularly the dramatic shift to work-from-home and other remote work scenarios – has had a dramatic impact on the demand for cloud services.
“Everything was underway already, but in the last couple of years it’s been this sudden land grab because of the overall shift in computing in the entire society based on the changed work situation.,” Kay said. “Everybody is having to do some kind of alternative thing, with most of it being virtual and off-site. The demand for cloud capacity has just skyrocketed the last couple of years.”
He expects the consolidation in the market to continue as demand for cloud services continues to grow and hyperscalers and other companies look to grow their data center footprint, though it won’t be able to sustain the break-neck pace that it has shown in the past five or so years.
Data Center Values Soar
The prices being paid for CyrusOne and CoreSite illustrate skyrocketing demand for data center capacity. KRR and GIP are paying a 25 percent premium for CyrusOne based on the data center company’s stock price on Sept. 27. The deal has already been approved by the CyrusOne board of directors.
“We have built one of the world’s leading data center companies with a presence across key U.S. and international markets supporting our customers’ mission-critical digital infrastructure requirements while creating significant value for our stockholders,” Dave Ferdman, co-founder and interim president and CEO of CyrusOne, said in a statement. “KKR and GIP will provide substantial additional resources and expertise to accelerate our global expansion and help us deliver the timely and reliable solutions at scale that our customers value.”
CyrusOne in the third quarter generated $304.1 million in revenue, a 16 percent year-over-year increase from $262.8 million. The company’s profit for the quarter was $6.7 million; during the same period last year, CyrusOne lost $37.7 million. For its part, CoreSite brought in $655 million in revenue during the quarter.
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