Should You Buy This Data Center SPAC IPO?

Starboard Value Acquisition Corporation (SVAC) is a special purpose acquisition company (SPAC) that recently announced plans to take data center operator Cyxtera public. In this Fool Live video clip, recorded on March 1, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss this pending deal and what investors should know about it. 

Jason Moser: Let's start with the one that is going to be materializing very soon. That's Starboard Value Acquisition and the ticker there is S-V-A-C. They recently just announced a merger. Talk to us about the company that they'll be bringing into the fold there and what the market opportunity it will be focused on.

Matt Frankel: Yeah. Starboard Value is a hedge fund. It's managed by Jeff Smith. Arguably the best activist investor of all time. He's the head of Papa John's (NASDAQ: PZZA) board. He'd help them when they were failing. Just get that was one of his successful recent ones. They have a great track record of value investments. It's why I bought the shares of this SPAC before they had this deal announced. They just announced the deal with Cyxtera which is the number three data center operator in the US. It will be the number three in the public markets. It's the biggest private data center operator. They have 61 data centers located all around the world. They're profitable. They generated almost $700 million in revenue in 2020. The deal values them at $3.4 billion, including the $650 million in cash they're getting as part of the deal. Which as I mentioned in the Payoneer interview a minute ago, growth takes money. One of the biggest draws for companies is you can raise more growth capital in a SPAC deal than you could, in a traditional IPO. Generally, companies don't sell 30-40% of their shares in a traditional IPO. But you can raise capital that's equivalent to that much of your stock in a SPAC. Mentioned $3.4 billion valuation, they're going to have $650 million in cash to play with.

Moser: Wow.

Frankel: If you're not familiar with Cyxtera, they formed. You remember a company called CenturyLink?

Moser: I do remember CenturyLink and I also remember Digital Realty Trust (DLR -0.76%) which you had mentioned because I think that's one you've called out on this show here before that's a REIT in the same space, right?

Frankel: Correct. Digital Realty and Equinix (EQIX -2.51%) are the two big ones in this space. Cyxtera will be number three. Cyxtera was formed from the data set of assets of CenturyLink, which was a telecom provider. That's where it came from, if anyone was wondering that. The data center business has a ton of growth catalysts as the AI man Jason can tell you. There's a lot of data heavy technologies that are exploding right now. The long-tailed roll out of 5G is going to make it easier for mass volumes of data to be transmitted from connected devices. It's a huge in-demand market right now, and Cyxtera really wants to grow into it. They've been independent of CenturyLink for just a few years. They're using their deal to really grow into it. Because it's really a value investment. It's not one of these big, high-profile growth investments like when they took DraftKings (NASDAQ: DKNG) public. It's not trading at a giant premium. I want to say it's like $10.50 a share right now instead of $10 for SVAC. They acquired it because it's a long-term value play in the data center space. Huge growth market. Look at a 10-year total return chart of Digital Realty. It's been a fantastic investment for people, you get in to the data center space in winning operators. It could be another alternative to the big guns in the data center space, if you will. I bought that one before they announced the merger agreement and I am not planning on selling. I love this acquisition, and now that it didn't really spike to a big premium. I might buy even more.

Moser: Well, there you go. Let me to your point there looking at the chart for Digital Realty. I mean, it's another one of those. You may not see it immediately in the near-term. It's a high yield. The longer you own it the more sense it makes. I can absolutely see the opportunity there. I think you keyed in a lot of important trends there and you just did the roll out of 5G in general, the build out of the infrastructure and all of these different capabilities that we're going to gain from it and internet of things and artificial intelligence and the AR and VR and just so many different capabilities that will really be enhanced by this and you're right, it's going to require a lot of data moving back and forth and that really strikes me. It's certainly a market opportunity that should be growing here in the coming years and so that merger has been completed then, is what you're saying. Cyxtera is now actually a part of that fixed budget.

Frankel: They've announced the merger. This is a very good question. It needs to be approved by the Board of Directors before it is announced, but before it is completed needs to go through regulatory approval and it needs to be improved by the SPAC's shareholders.

Moser: Got you.

Frankel: That's another kind of fail safe. If you buy a SPAC pre-deal, if the shareholders just don't like the acquisition target at all. Let's say this stock point just to $5 or $6 after the acquisition target comes out. Shareholders can vote the deal down. It doesn't happen often. But it is subject to a few closing conditions. At some point that ticker symbol will be CYXT when the deal is done. Cyxtera Technologies. But for now it's still trades as Starboard Value Acquisition SVAC.