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Why Rackspace Hosting, Inc. Soared Again Today

By Anders Bylund - Aug 5, 2016 at 11:30AM

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Thursday's buyout rumors got some more meat on their bones today.

Image source: Rackspace Hosting.

What: Shares of Rackspace Hosting ( RAX ) are rising again, jumping as much as 18.8% higher on Friday morning. The move follows a 12.7% boost in the final minutes of Thursday's trading session, sparked by rumors of a private equity takeover.

So what: Friday's lift looks back at the same buyout rumors, but with some added detail. According to Reuters, Apollo Global Management is the private equity firm you'll find in Rackspace's conference rooms these days. Another batch of anonymous insider sources peg the buyout price at "over $3.5 billion."

Now what: We're still in the domain of uncertain rumors, and Reuters admits the talks still could come to nothing. Rackspace has been searching for an exit strategy for two years, and several purported buyouts have already dissolved.

That being said, Apollo could absolutely make a move. The company already has interests in Rackspace's cloud computing markets, and it could be interested in another high-quality cloud asset. Apollo has also been very active recently by announcing billion-dollar takeovers of companies in the grocery store, private education services, and home entertainment spaces. Rackspace would be Apollo's largest deal so far in 2016, but $3.5 billion is a realistic bid size from the equity firm's point of view.

As a Rackspace owner myself, I'm less convinced that a $3.5 billion deal would be approved by the company's shareholders. That would be in line with Rackspace's current enterprise value, meaning the suggested buyout premium already has been baked into current trading prices. Share prices have declined by 10% over the last 52 weeks, and that includes the boost of more then 25% since Thursday night.

If Apollo Global makes this bid official, Rackspace's shareholders may hold out for a better deal. Now, essentially all of Rackspace's shares are held by insiders and institutional investors, so that would be the starting shot for further negotiations.

This buyout has a long way to go, but at least it looks like there's some substance to the bidding rumors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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