Windstream to Sell Data Center Business for $575M

In what may be a sign of things to come, Little Rock, Arkansas-based telecommunications company WindStream Communications has agreed to sell its data center services business to TierPoint, a rollup that’s been focused on buying companies that provide data center services in under-served regional markets.

Telcos buying data center and cloud service providers was a regular occurrence in recent years, as telcos sought to compensate for shrinking revenues from traditional telco services by leveraging their network infrastructure to expand broader into the enterprise IT services market. Some of them, however, are now getting out of the data center business, and Windstream's TierPoint deal is an example.

Windstream has more than 20 data centers, most of them on the East Coast, with some in the Midwest, South, and on the West Coast. It expanded its data center portfolio greatly with acquisition of Hosted Solutions for $310 million in 2010.

Windstream leases at least some of its data centers from wholesale providers, including Compass Datacenters and Sabey Data Centers.

Following the transaction, valued at $575 million, TierPoint and Windstream will cross-sell each other’s services, meaning Windstream will still be able to offer data center services to enterprise customers, but it will not have the expense of operating the facilities.

“Data center services will remain an integral component of our enterprise service offering,” Tony Thomas, Windstream president and CEO, said in a statement.

Earlier this month, investment banking firm Cowen and Company initiated coverage of CenturyLink – a telco with a massive data center services business it gained largely through acquisition – but called on the company to spin off its cloud and hosting services business after a broad examination of CenturyLink’s revenue streams. Cowen analyst Gregory Williams said that segment of CenturyLink had been performing poorly and that it was indicative of the state of affairs at other telcos that provide data center services.

Example of a major telco that wants to sell $2 billion worth of data center assets is AT&T, according to an anonymously sourced report by Reuters earlier this year. Another example is Tata Communications, which is reportedly shopping around its more than 1 million square feet of data center space around the world.

The biggest examples of telcos buying data center service providers were Verizon’s $1.4 billion acquisition of Terremark, CenturyLink’s $2.5 billion acquisition of Savvis, and the $1.2 billion acquisition of ViaWest by Shaw Communications. A smaller example would be the $230 million NaviSite acquisition by Time Warner Cable in 2011.