What happened
Shares of data center operator Switch (SWCH) jumped 13% in May, according to data provided by S&P Global Market Intelligence. While the company reported strong first-quarter results last month, the big driver was its agreement to a buyout transaction with two infrastructure investors.
So what
First-quarter results, reported in early May, showed $164.6 million in revenue, up 26% from the year-ago quarter. That's due to the recent acquisition of Data Foundry and strong organic growth as customers secure more capacity in its data centers.
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Switch also noted that demand for space in its data centers remains strong. CEO Rob Roy stated that "our longer-term sales funnel remains at or above record levels as we continue to see high levels of customer interest for Switch Tier 5 data center capacity scheduled to come online in 2023 and 2024."
The strong market conditions in the data center industry have caught the attention of data-focused infrastructure investors. That's caused a wave of acquisitions in the sector, with several data center REITs agreeing to buyout deals over the last year. Switch is the latest data center company joining the consolidation wave, agreeing to be taken private in an $11 billion all-cash deal last month.
Infrastructure investors DigitalBridge Group (DBRG -0.64%) and IFM Investors agreed to acquire all the outstanding shares of Switch for $34.25 apiece. That's an 11% premium to its trading price the day before the deal announcement and 66% above where shares traded last August when an activist investor pressed the company to consider converting into a REIT. Switch expects the deal to close in the second half of 2022.
Now what
Switch's rally following the buyout announcement has shares currently trading within 2% of the agreed-upon price. While a higher offer could emerge (there were reports of a bidding war for the company), that seems less likely given that a few weeks have passed since Switch announced its deal. Because of that, investors seeking exposure to the data center sector might want to consider one of the two remaining data center REITs instead of Switch.
Industry leaders Digital Realty Trust (DLR 0.63%) and Equinix (EQIX -2.44%) have long histories of creating value for their shareholders by building and buying new data centers to support steady dividend growth. Both REITs also have excellent growth prospects, including several data centers under development. Those features make them look like attractive long-term investment opportunities.
