Digital Realty to Acquire DuPont Fabros in Blockbuster Deal

It’s a marriage made in the cloud. Digital Realty will acquire one of its oldest and largest rivals, DuPont Fabros Technology (DFT), in a blockbuster $7.6 billion transaction that will boost its ability to serve the fast-growing hyperscale market. DFT is a leading provider of data center space for some of the Internet’s largest players, including Microsoft, Apple and Facebook.

The deal is a case of the big getting even bigger. Digital Realty is the largest landlord in the world of technology real estate, with 145 properties spanning 23 million square feet of data center space across 33 global markets, while DuPont Fabros operates 3 million square feet of space in 12 huge data centers focused in the largest cloud markets.

It’s a merger driven by trends in the hyperscale market, where DuPont Fabros has signed a flurry of enormous leases with cloud services providers and marquee names in the tech industry. CyrusOne has also seen significant success in the battle for “super wholesale” deals, emerging as a significant competitor to its older rivals.

Digital Realty has struggled to win these huge deals, which can exceed 15 megawatts of data center space. With this acquisition, Digital Realty improves its ability to land deals with cloud providers, especially in DFT’s core market of “Data Center Alley” in Ashburn, Virginia.

“We believe we are in the early innings of cloud computing adoption,” said William Stein, Digital Realty’s Chief Executive Officer, who said the combined company would be the “home to the cloud.”

A Legacy of Deal-Driven Growth

It’s the latest in an ongoing series of mergers shaping the competitive balance in the data center market. Digital Realty reasserts itself as the industry’s leading consolidator, coming just two years after its $3 billion acquisition of Telx.

“This strategic and complementary transaction significantly enhances Digital Realty’s ability to support the growth of hyper-scale users in the top U.S. data center metro areas, while providing meaningful customer and geographic diversification for DuPont Fabros,” said Stein, who noted that this was the largest deal in the company’s history.

The all-stock deal shapes up as a major transaction in the world of real estate investment trusts, where data center developers have emerged as the hottest asset class. DuPont Fabros shareholders will receive a fixed exchange ratio of 0.545 Digital Realty shares per DuPont Fabros share, for a transaction valued at approximately $7.6 billion in enterprise value.

DFT Shares Gain on Announcement

Shares of DuPont Fabros rose 13 percent in pre-market trading.

“We are excited to deliver this compelling transaction to our shareholders and execute upon two of the strategic objectives embodied in our corporate vision – diversifying our customer base and expanding our geographic presence,” said Christopher Eldredge, DuPont Fabros’ President and CEO. “As part of Digital Realty, our shareholders will continue to realize the benefits of our high-quality portfolio, with the added benefits of belonging to an even greater data center network with a truly global footprint and a well-diversified customer base. We look forward to working closely with the Digital Realty team over the coming months to close the transaction and bring our two companies together.”

Digital Realty cites several key benefits of the deal:

• Ability to Serve Top U.S. Data Center Markets: DuPont Fabros’ portfolio is concentrated in top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley. The transaction will help grow Digital Realty’s presence in strategic, high-demand metro areas with strong growth prospects, while achieving significant diversification benefits for DuPont Fabros’ shareholders from the combination with Digital Realty’s existing footprint of 145 properties across 33 global metropolitan areas.
• Expands Digital Realty’s Hyperscale Product Offering: DuPont Fabros’ 12 purpose-built, in-service data centers will boost Digital Realty’s hyperscale inventory and ability to meet the rapidly growing needs of cloud customers. The deal also provides DuPont Fabros with the addition of colocation and interconnection product offerings.
• Broader Blue-Chip Customer Base: DuPont Fabros’ roster of blue-chip customers – which includes Microsoft, Facebook and Apple – will further enhance the credit quality of Digital Realty’s existing customer base. On a combined basis, investment grade or equivalent customers will represent more than 50 percent of total revenue.
• Boosts the Development Pipeline: DuPont Fabros’ six data center development projects currently under construction are 48 percent pre-leased and represent a total expected investment of approximately $750 million, and amount to roughly a 26 pervent expansion of its standalone critical load capacity. These projects are located in Ashburn, Chicago, Santa Clara and Toronto, all metro areas where Digital Realty has an existing presence. In addition, DuPont Fabros owns strategic land holdings in Ashburn and Oregon, which will support the future delivery of up to 163 megawatts of incremental capacity, along with 56 acres of land recently acquired in Phoenix.
• Improved Operations and Efficiency: Digital Realty says the combined company is also expected to have the most efficient cost structure and the highest EBITDA margin of any U.S.-based publicly-traded data center REIT. The combination of the two companies is expected to create an opportunity to realize up to $18 million of annualized overhead savings.

Stay tuned for more analysis and reaction. The companies are scheduled to hold a conference call this morning with analysts and the investment community.