Eager Eyes on Interxion for European Data Center Buyout

Financial institutions have great expectations for the potential takeover of Interxion, one of the biggest operators of internet infrastructure in Europe, after a report that big-pocket investment funds are competing to buy the company.

Their interest is peaking as wealthy infrastructure and sovereign wealth funds have been making large investments in other firms that, like Interxion, run data centers that act as hubs for major international and national digital communications tributaries.

Interxion and its potential suitors refused to comment on a report that it had responded to numerous takeover offers by asking the suitors to submit competing bids by 1 November. Interxion said it didn't comment on rumours and speculation. The investment funds said they simply did not comment.

Market analysts said Interxion had been subject to takeover rumors continuously in recent years, as it pursued takeovers and ventures of its own in parts of the world where the internet was just starting to grow vigorously -- most notably in Africa.

Funds are particularly interested in Interxion because of its control over Europe's major communications hub in Marseille, where 14 subsea internet cables land from Africa, the Middle East, and Asia, and terminate in a single data center. Interxion owns that data center.

Related:Tons of Data Center Businesses on the Market. Not All Will Sell

"It's the gateway to the Middle East, Asia, and Africa," Nate Crossett, an analyst with Berenberg Bank, told DCK. The internet, spearheaded by cloud computing companies, is expanding in these regions. That expansion involves building infrastructure that will ultimately route much international internet communications traffic through Marseille.

Infrastructure Funds

Investors are especially interested in Europe itself as well, Crossett said, because the internet still has a lot of growing out to do there. Europe's economy is about the same size as American economy, but its data center industry is still only 40 percent the size. Investors anticipate "a long runway of demand," he said, as communications networks mature.

"We've seen tremendous interest from infrastructure funds in our space," Jerry Marshall, CEO of Netrality Data Centers, told DCK in an interview after his company was acquired by a $5 billion US-focused infrastructure fund managed by the Australian investment banking giant Macquarie Group.

"Because the backbone of the internet is infrastructure, and our properties -- and our core interconnection points for those -- are for the internet. It's not limited to the data center industry. It's all digital infrastructure that the infrastructure funds are focusing on," he said, referring to things like fiber networks and wireless towers.

Related:This is Europe’s Hottest Emerging Data Center Market

Macquarie gave Netrality "access to significant growth capital to acquire new properties and businesses", he said in a press statement at the time.

"We're looking to acquire properties that are in new markets for us," Marshall told DCK.

"We look for those assets that have the best connectivity. Those locations that have undersea cables that terminate in backhaul to the properties -- those are always the most interesting to us," he said.

Macquarie raised a €6 billion EU infrastructure investment fund in June, simultaneous to the fund that acquired Netrality. It would invest in communications, transport, renewables, and utilities, the company said. It hired experts in digital infrastructure earlier this year and bought KCOM, a company that operates a fiber communications network in Hull, England.

Rumor

Macquarie was not one of the potential Interxion suitors listed in last week's report that relied on anonymous sources, but the report did not claim the list was complete. The suitors listed were KKR, a US fund that invested in Telxius, a Telefónica subsidiary that operates subsea cables; Blackstone, the world's largest alternative fund; and Digital Colony, a fund that raised $4 billion in June to invest in internet infrastructure for 5G mobile comms, artificial intelligence, and the Internet of Things.

Mitul Patel, analyst with the global real estate services firm CBRE, said he was consulting numerous deep-pocketed investment funds that wanted to get into data centers because they were very profitable.

"Everybody's looking at everybody," said Robert Gutman, analyst with Guggenheim Securities, an investment bank. "There are a lot of ongoing processes in the space right now." Data center firms need large sums of capital to expand, while private investors are "aggressively" pursuing opportunities to buy data centers that act as key interconnection points for internet traffic.

Interxion, according to analysts, has something all the funds want: internet data centers at all the major European hubs.

"You either have it or you don't. And if you don't have it, you most likely have to buy it," Crossett said. "Those assets are incredibly hard to replicate, in a lot of the good locations near major networks and that network connectivity -- a lot of those good locations are already gone.

"The most important thing you need in this space is location. That's why there's been a lot of M&A chatter recently. A lot of these private equity guys, it's just so hard for them to build it from scratch themselves."

Competitive Moat

Interxion has either built or bought internet data centers on valuable land in the four main European internet hubs: Frankfurt, London, Amsterdam, and Paris (often referred to collectively as "FLAP"). It also operates hubs in Madrid, Brussels, Zurich, Vienna, and Düsseldorf, according to  public records. In Frankfurt, in 1993, an Interxion data center was the first to host DE-CIX, the German Internet Exchange, through which different internet networks barter transit with one another. Interxion's own summary of its Frankfurt business said it had 13 data centers there, hosting servers and connections for more than 700 telecoms carriers, internet service providers, and content delivery networks.

Investors couldn't replicate data centers as densely connected as Interxion's, said Crossett. The company's portfolio formed by gradual accumulation, as one network carrier attracted service suppliers, as fiber connections were established with other nodes of the internet, as service suppliers and connections attracted other carriers, and so on. Corporations then rented space to put their systems in connected data centers next to servers operated by cloud service suppliers, who put their servers in data centers where they might get direct connections to multiple networks.

This has been Interxion's "competitive moat," said one equity broker who asked not to be named. Interxion CEO David Ruberg, however, suggested this was in danger of changing in his quarterly conference call with analysts in August.

Generational Shift

The internet, of course, is growing because of the booming demand for cloud services. Corporations in particular are in the midst of such a big transfer of their computing infrastructure to the cloud that the internet is undergoing a "generational shift," Ruberg said. Cloud suppliers are "in an arms race" to capture this enterprise market, and most of Interxion's business growth is led by this arms race. But the cloud providers have also been building their own infrastructure -- their own subsea cables and their own data centers -- in locations away from the major existing internet hubs.

"A key element of demand uncertainty facing our industry is the degree to which platforms will build their own data centers rather than relying on third parties," said Ruberg.

The trend caused QTS executive Clint Heiden to declare last month that Amsterdam, which vies for the title of Europe's most connected internet hub, has reached its peak capacity for data centers and comms, and that the internet needs to grow major tributaries through other cities to carry traffic generated as the internet fills out in other areas, and as 5G, AI, and IoT drive demand for more infrastructure than the already congested major cities can supply without great risk of catastrophe. Heiden and QTS have been working with cloud service providers and cable firms to build cables to alternative locations.

The congestion in Amsterdam is not unique, Ruberg told analysts. The issues there are just made "highly visible" by the actions of one politician. Amsterdam's government, led by that politician -- its deputy executive -- decreed in July that data centers were making such intense demands on municipal resources that the city must call a moratorium on building any more. Google, Microsoft, Facebook, and Amazon have notably been laying undersea cables and building data centers in other locations.

Ruberg reckoned the cloud firms would still need to rent space in its central data centers, however. Because they still need proximity to customers in the big city hubs -- especially their enterprise customers. Analysts who were on that call later told DCK that connected data center businesses like Interxion's are not threatened by cloud companies building their own infrastructure.

Earlier this month, as more details of the rumor seeped out and Interxion's share price hit an all time high of $87, Crossett told DCK it was worth $100 a share. Interxion had both data centers and options on valuable land in Marseille, Paris, and Frankfurt. Last week, when shares hovered close to $88, he reckoned its value had gone up to $113. The company last week also held a press event at a WW2 Nazi U-boat bunker in Marseille, which it has been planning to convert to data center for several years.

Money Pressures

Another analyst who asked not to be named, however, said Interxion was overpriced. "Interxion was always considered sort of expensive. And it certainly hasn't gotten any cheaper," he said. And though Interxion might not be threatened by the internet's generational shift to the cloud, shareholders still expect to see growth, and the company needs capital to do it.

Interxion issued shares in July, raising €283 million for data center construction. It said in August it would spend €600 million on building in 2019. It already spent €123.5 million in the three months ending on June 30, 95 percent of that on building data centers. The company reported €159 million in sales for that quarter. It has in 20 years accumulated assets worth €1.9 billion, which amounts to 52 data centers, mostly in European capitals.

Google, by comparison, spent $6.1 billion building data centers in the same period. It would spend €3 billion on European internet infrastructure alone in the next two years, Google said this month. In June it said it would increase spend on data centers by €1 billion just in Holland. (Those would be away from Amsterdam.) Google has spent €15 billion on European infrastructure since 2007.

Meanwhile, Redwood City, California-based Equinix, the world's largest data center provider with a business model similar to Interxion's, had data center assets worth $10 billion in all when it published its June quarter results. That included 62 data centers in Europe and the Middle East. Forty of those were European sites it acquired by buying out Telecity, a data center firm that Interxion was due to take over in 2015, when Equinix gazumped it.

But in June, Equinix did a deal to get money to invest in Europe from GIC, the Singapore sovereign wealth fund that like the funds rumored to have approached Interxion has been investing in internet infrastructure. GIC has put up an undisclosed sum of money to build four Equinix data centers in London, Amsterdam, and Frankfurt. In return, it will get an 80 percent share of a joint venture it formed to run them with Equinix, and another two data centers in Paris and London that were the latter's contribution to the deal. Prior to that, Equinix had spent nearly $1 billion building data centers worldwide in the first half of this year. The Europe share of that -- $335 million -- was on a par with Interxion's spend.