More Data Center Deals Likely in 2010

As the debt and equity markets begin to thaw, the initial public offering for the Telx Group is likely to be the first of many transactions to come in 2010 in the data center sector, according to analysts and industry insiders, who say the industry is poised for a flurry of deals - including IPOs, financings, and acquisitions of facilities and companies.

"There are lot of deals going on in the hosting and data center sector," said Dan Golding, Managing Director of DH Capital, an investment bank that specializes in the hosting and telecom sectors. "The reason there will be so many deals is that many were already in the works in 2008 and early 2009. You've got all these deals that are lined up and waiting to go."

"In the short term, we're going to see a lot of equity come into this space," said Jim Kerrigan, director of the national data center practice at Grubb & Ellis. "There will be a lot of new faces, and familiar faces in new roles. All these deals that got shelved in 2009 because the CFO said no ... they're going to happen. That's going to be good for the business."

Private Equity Firms Get Active
Telx filed papers Thursday for an IPO that could raise up to $100 million for the provider, which offers colocation and interconnection services. Telx is among the data center providers backed by private equity firms that continued to expand during the economic downturn, a group that also includes Corelink, Latisys, QTS, CyrusOne, Peak 10, Hosted Solutions, ViaWest and The Planet.

At the recent DataCenterDynamics New York and Data Center World conferences, there was chatter about potential "roll ups" in the colocation and managed hosting sectors, as emerging players seek to build a national footprint by acquiring providers and facilities with a track record of growth and solid management. The activity could provide exits for some investors, growth capital for some providers, and bring additional shifts to a competitive landscape bracing to absorb the pending merger of two major players, Equinix and Switch and Data.

The talk of a surge in transactions doesn't signal a shift in sentiment, analysts and, but rather the ability to fund existing investor sentiments.

Strong Investor Interest
"The door hasn't really been open because of the capital situation," said Golding. "There's tremendous interest in this sector from investors. Over the last two years most sectors have performed poorly. There really aren't too many bright spots. But the data center and hosting sector has done well. I think there are a number of high-quality data center properties that investors find attractive."

While there may be additional money flowing into the data center sector, Golding said that won't necessarily alter the tight supply of quality space in key markets.

"It's going to affect supply very little," he said. "There are a lot of deals going on. A few are injecting capital, but most are just one party acquiring another. This isn't moving the needle as far as supply. We are seeing lots of supply constraints."

NOTE: Dan Golding is offering complimentary research notes about the data center and hosting sector. You can send email to [email protected] to subscribe.