Digital Realty Trust (DLR US) recently announced the acquisition of publicly listed competitor, DuPont Fabros Technology (DFT US) for US$4.95 billion plus the assumption of debt totalling US$1.6 billion.
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The transaction will be financed with 0.545 Digital Realty shares for every share owned in DuPont Fabros. Existing Digital Realty will hold about 77 per cent of the combined company with the remainder 23 per cent being held by existing DuPont Fabros shareholders. The acquisition is expected to close in the second half of 2017 and requires shareholder approval from both companies.
Why is this significant for Digital Realty?
1. Adds to scale and growth areas
Digital Realty is already one of the world’s largest data centre Real Estate Investment Trusts (“REIT”) and this will add to its scale. Importantly, it will add 12 data centres in growth regions in the U.S. such as Silicon Valley, Chicago and Northern Virginia to its existing portfolio of 145 data centres in 12 countries.
Adding these 12 data centres will add to Digital Realty’s capabilities in servicing the growing hyper-scale and cloud markets. The combined company will have about 26 per cent of its revenues come from cloud customers such as Microsoft, IBM and Facebook.
The acquisition will enhance Digital Realty’s exposure to large scale data centres of 10MW+ to add to its existing offering of mostly medium sized data centres of between 500kW to 5MW in size.
Dupont Fabros also brings with it a US$750 million development pipeline of 6 additional data centre development projects currently under construction, which are 48 per cent pre-leased and are expected to be delivered within the next 12 months. These projects are located in metropolitan areas in the U.S. and Canada where Digital Realty has an existing presence.
Digital Realty expects to save US$18 million from cost synergies from the acquisition and expects DuPont Fabros to be immediately accretive to earnings (between 2 per cent and 4 per cent) and add to its balance sheet strength as its overall debt coverage improves.
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As such, Digital Realty expects the combined company will have the most efficient cost structure and the highest earnings before interest, tax, depreciation and amortisation margin of any U.S.-based publicly-traded data centre REIT.
3. Competitive positioning
The acquisition represents an important re-weighting in the balance of power between data centre owners and their customers, particularly the larger cloud customers. As the industry consolidates, we expect the larger players such as Digital Realty, who are the only owners who can build and manage these hyper-scale data centres will have more negotiating power in terms of price, lease terms and lease lengths.
At the time of writing, the AtlasTrend Big Data Big Fund owned shares in Digital Realty Trust. You can find out more about why we have invested in Digital Realy Trust by CLICKING HERE and then click “Learn More” on the company card
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About the author
Kevin Hua is the co-founder of AtlasTrend which is a member of the Which-50 Digital Intelligence Unit. Members contribute their expertise for the benefit of our readers. Membership fees apply.