By Rich Miller,
March 30, 2022

Data center developer CyrusOne is now a private company after closing its $15 billion sale to investment firms KKR and Global Infrastructure Partners on Friday.

This is a transition with consequences for both CyrusOne and the data center industry. The new owners bring financial resources to help CyrusOne capitalize on the huge global appetite for digital infrastructure. The company is also joining the growing ranks of private data center platforms backed by major global investors, a trend that is impacting the competitive landscape and deal structures.

Significantly, the acquisition resolves any uncertainty about the future of CyrusOne, which has undergone a series of management changes in recent years amid market rumors that the company was for sale.

“The closing of this transaction opens an exciting new chapter for CyrusOne as we continue our global expansion with the benefit of the significant resources and expertise that KKR and GIP are able to provide to the company and its customers,” said Dave Ferdman, President and CEO. by CyrusOne. “We are very well positioned to capitalize on accelerating growth opportunities driven by strong underlying secular demand trends and create substantial value for all of our stakeholders.”

Investors are transforming the cloud landscape

CyrusOne has been a leader in the rapid growth of the data center industry, advancing building techniques at high speed and scale. The company is at the forefront of a trend in which the world’s largest large-scale internet companies have begun to lease cloud capacity from data center developers, rather than building their own server farms. .

CyrusOne operates more than 50 data centers and 4 million square feet of data center space around the world, working with both hyperscale operators and enterprise customers. The company’s focus on accelerated deployment has helped it reach the highest levels of data center activity. When applied at scale, over time, these techniques allow CyrusOne to create massive data center campuses.

The world’s largest investors are eager to invest in digital infrastructure, which is seeing extraordinary demand for capital to power the data economy. In the past nine months, three of the largest public data center real estate investment trusts (REITs) have been acquired, including QTS Realty, CoreSite and now CyrusOne. Switch shares have risen in recent days amid reports that the company is consulting with advisers on strategic options, including a sale.

These agreements limit the number of options for small investors who are only now discovering the growth of digital infrastructure. But for long-term owners of data center REITs, the recent M&A action has already been a loud party, as acquirers have paid high prices to navigate the data center industry.

More capital to drive growth at scale

The new owners of CyrusOne see a lot of benefits as the company shifts to digital delivery of products and services.

KKR has a 40-year history of high-profile transactions, including leveraged buyouts. In 2020, the company entered the data center industry with the formation of Global Technical Realty (GTR), which plans to develop more than $2.5 billion in data center capacity. CyrusOne adds to the capabilities of the company.

“We see a significant opportunity for CyrusOne to build on its market-leading position and impressive track record of delivering state-of-the-art data center solutions around the world, at a time when the world depends on it more. moreover, at a rapid pace,” said Waldemar Szlezak, partner at KKR. “We look forward to leveraging our global experience in digital infrastructure investment to, together with GIP, support CyrusOne’s continued growth, and we are excited to get started.”

Global Infrastructure Partners is one of the world’s largest infrastructure funds, managing over $79 billion in assets and offices in the world’s major financial capitals. Infrastructure funds typically invest in large projects with predictable returns, such as airports, ports, and power generation. These funds are increasingly interested in the strong returns available in digital infrastructure, which fits their model for a capital-intensive sector.

“The secular growth in global data consumption has created a tremendous opportunity for skilled data center developers and operators to deliver critical infrastructure to their customers, including the world’s leading technology companies,” said said Will Brilliant, partner at GIP, who said the firm will work with KKR. and management, “bringing our deep experience and resources as a leading infrastructure investor and operator to underpin CyrusOne’s differentiated global platform, which is well positioned to build momentum and unlock additional potential. important under his new sponsorship”.

The private vs. public dynamic continues to evolve

The influx of capital, along with M&A action for public players, has gradually changed the competitive landscape of the data center industry, with more private operators and fewer public companies. As more large investors build data center platforms, the cost of capital is an increasingly important competitive differentiator, allowing companies with low borrowing costs to build new capacity at lower cost.

This cost advantage allows builders with low-cost capital to earn better returns than competitors with higher borrowing costs, or to adjust their prices to win more contracts. This is a particular concern for public REITs, which are increasingly battling for deals with deep-pocketed private players.

One question is whether large deals and more private players will mean lower returns for data center developers. Data center REITs have historically had higher capital returns than REITs in other asset classes like office and shopping center properties. Competitive pressures from private players could reduce margins over time. Securities analysts who track data center REITs are wary of them and are looking closely at the returns of large deals from the companies they follow.

The leaders of public players say they are used to competition and can maintain their margins by continuing to improve the efficiency of their operations. The two largest public data center REITs. Digital Realty and Equinix each operate giant global networks of more than 200 data centers and have investment-grade credit ratings that lower their cost of capital.

One question is how CyrusOne will approach its colocation business. In January, the company sold four Houston data centers to colocation provider DataBank for $670 million. The deal raises interesting questions about CyrusOne’s future strategy and the possibility of further shrinking its portfolio and divesting additional assets. CyrusOne offers colocation services in many facilities, but much of its growth has been driven by its wholesale data center business, which rents larger increments of space in suites, data rooms and even entire buildings.