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A Major Data Center Operator Is Going Public Through a SPAC Merger

Feb 22, 2021 by Matt Frankel, CFP
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We've seen an unprecedented number of special purpose acquisition companies, or SPACs, launch in the past year or so. Numerous electric vehicle, fintech, real estate, and other exciting start-ups have chosen to skip the traditional IPO process in favor of going public through one of these blank-check companies.

Well, it doesn't look like the SPAC boom is slowing down just yet. We just learned that data center operator Cyxtera has agreed to go public via a merger with Starboard Value Acquisition Corporation (NASDAQ: SVAC), a SPAC sponsored by notable activist investment firm Starboard Value.

What is Cyxtera?

Cyxtera is a data center operator with 61 data centers located around the world and is the largest privately held retail colocation data center operator. The company was formed in 2017 from CenturyLink's data center division and serves more than 2,300 customers.

Once public, Cyxtera will become the third-largest player in the retail colocation data center space, behind Equinix (NASDAQ: EQIX) and Digital Realty (NYSE: DLR). In 2020, Cyxtera generated $690 million in revenue and adjusted EBITDA of $213 million.

Terms of the deal

One of the biggest reasons so many companies are choosing the SPAC route to go public is that it can provide a big windfall of growth capital, and that's certainly the case here. In addition to the more than $400 million raised in Starboard Value's IPO, the deal includes a separate private investment round (known as a PIPE, for private investment in public equity, in SPAC lingo). In all, Cyxtera will receive $654 million in cash upon the deal's closing, giving it tons of ammunition to grow the portfolio and pursue opportunities.

It sounds like that's exactly what the company plans to do. According to Cyxtera CEO Nelson Fonseca, "By merging with SVAC, we are able to accelerate our plans to drive high-margin growth by increasing utilization of our existing assets, developing innovative product offerings, and expanding our global footprint."

Including the influx of cash as well as the company's existing debt, the deal values Cyxtera at about $3.4 billion. Considering that current owners BC Partners and Medina Capital created Cyxtera in a deal worth about $2.8 billion in 2017, this certainly seems like a reasonable valuation. Based on Cyxtera's projections, this values the company at about 16 times 2021 adjusted EBITDA.

Once the deal is finalized (expected in mid-2021), Starboard Value Acquisition will officially change its name to Cyxtera and will trade under the symbol CYXT on the Nasdaq stock exchange. The deal is dependent on approval by the SPAC's shareholders, but that shouldn't be an issue.

Should you invest?

The data center industry has some clear growth tailwinds, such as the gradual rollout of 5G technology and the surge in data-heavy technologies like autonomous vehicles, augmented reality, and more. The global colocation market was $48 billion in size in 2019 and is expected to grow to $92 billion by 2025. Internet of Things (IoT) spending worldwide is expected to surpass $1 trillion between now and 2024. If you're looking for a way to invest in the exciting world of data centers but want a more up-and-coming player than market leaders Digital Realty Trust and Equinix, Cyxtera could be worth a closer look.

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Matthew Frankel, CFP owns shares of Digital Realty Trust and Starboard Value Acquisition. The Motley Fool owns shares of and recommends Digital Realty Trust and Equinix. The Motley Fool has a disclosure policy.