Cyxtera to Go Public Through $3.4 Billion Merger With Starboard SPAC

Colocation specialist Cyxtera Technologies will become a public company through a merger with a special purpose acquisition corporation (SPAC) sponsored by investment firm Starboard Value. The deal, which values Cyxtera at $3.4 billion marks the first major deal by a group of SPACs targeting the data center sector.

The combined company will continue to operate as Cyxtera and be listed on the NASDAQ exchange under the symbol CYXT, with the current ownership led by private equity firms BC Partners and Medina Capital retaining a 58 percent ownership position. Cyxtera is one of the largest privately-held colocation providers in the world, with 61 data centers in 29 markets around the world and more than 2,300 enterprise customers.

Cyxtera Executive Chairman Manuel Medina and CEO Nelson Fonseca will continue to lead the combined company. Starboard Value Acquisition Corp. (SVAC) will invest $654 million into the new company, including a $250 million private stock placement from institutional investors including Fidelity Management.

“As a new Cyxtera enters its growth chapter, we’re thrilled to partner with Jeff Smith and the SVAC team,” said Medina. “In addition to helping accelerate our growth along multiple vectors, Starboard’s deep expertise across corporate governance, operational excellence, and capital allocation will immediately benefit us as a public company, as we drive long-term value creation.”

“Cyxtera is exactly the kind of opportunity we were targeting when we created SVAC,” Jeff Smith, Chair of SVAC and CEO of Starboard Value. “Cyxtera is at an exciting inflection point, poised for significantly improved growth and profitability in an industry with powerful secular tailwinds. Cyxtera’s world-class team, led by Manny and Nelson, has built a high-performance, trusted, and reliable global platform, without losing their customer focus or passion for innovation.”

SPACs Kick off New Phase of Data Center M&A

The Cyxtera deal is the first in a likely series of transactions in which SPACs seek business combinations with data center companies. It also reflects DCF’s forecast that 2021 would be a year of major data center M&A.

The new Cyxtera might contribute to that trend. “Cyxtera is well-positioned to be a consolidator” in the global data center industry, said Fonseca, who said the sector was “fragmented and ripe for further consolidation.” As a public company with Starboard’s backing and expertise, Fonseca said Cyxtera will seek opportunities to expand in international markets in South America, Europe and Asia, including acquisitions of individual facilities or operating companies.

Cyxtera is a retail colocation provider offering a resilient infrastructure platform for critical applications. The deal marks a vote of confidence in the colocation sector and its potential for growth. Amid a massive influx of capital from global investors into digital infrastructure, much of the investment action has focused on opportunities in the hyperscale sector, especially wholesale space for cloud platforms – a model offering predictable long-term revenue from real estate leases.

The retail colocation sector sells data center capacity in smaller increments – typically cabinets and cages – with shorter contracts. As a result, it is a trickier valuation proposition for new investors to the sector. But Medina says this is where to look for the next phase of growth.

The Sweet Spot for Enterprise Business

“We strongly believe retail colocation is the sweet spot going forward for the data center industry,” said Medina. “Retail colocation is best positioned for accelerated growth, and interconnection is a foundational element for any growing data center platform.”

Medina’s emphasis on interconnection – the physical connections between networks within a data center – has been borne out in recent trends in colocation. Leading players are seeking to build a compelling story for customers who want to connect to everything, tying together cloud and colocation facilities with on-premises data centers and business partners. Medina says Cystera has worked to create a connected ecosystem in which service providers can sell to enterprises.

Cyxtera has developed the Cyxtera Extensible Data Center Platform (CXD), an early adoption of bare metal servers to deliver colocation space with cloud-like “on demand” provisioning speed, along with a point-and-click interface to create virtual cross-connects. He also touted Cyxtera’s close working relationship with technical computing chipmaker NVIDIA as a way to capitalize on surging enterprise investment in AI.

“At Cyxtera we’ve built a data center platform that’s ideally positioned to deliver the type of differentiated solutions that enterprises, service providers, and government customers require to meet their ever-changing infrastructure needs,” said Fonseca, CEO of Cyxtera. “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.”

Starboard Likes the Leadership Team

Smith said Starboard was impressed with the Cyxtera management and its ability to continue building a winning platform. This is the second big revenue event for Medina and his team, which previously built Terremark from a startup through its acquisition by Verizon for more than $1 billion in 2011.

After Terremark was acquired by Verizon in 2011, Medina began investing in emerging companies at Medina Capital, acquiring security-focused startups Cryptzone, Catbird, Easy Solutions and Brainspace. In 2016 Medina Capital teamed with investors including BC Partners and Longview Asset Management to buy the data centers portfolio of CenturyLink for $2.15 billion.

The resulting company was renamed Cyxtera Technologies, integrating the data center infrastructure with the security expertise of Media Capital’s cybersecurity holdings.

“We believe leadership truly matters,” Smith said in a conference call this morning. “Our goal was to find a business with the opportunity for transformation. We look for companies with significant opportunity for improvement, and the ability to drive for long-term value creation. We found all of this in Cyxtera.”

Starboard says it seeks to invest in “deeply undervalued companies” and over the years has engaged with management of public companies to boost performance and share price. Smith said Cyxtera fit the bill as a “carve out” from a former telecom company that has retooled for a more innovation-driven landscape.

“Cyxtera operates in an industry with powerful secular tailwinds,” said Smith, who said Cyxtera “is now at an inflection point, and poised to succeed as a public company.”