Blackstone to Acquire QTS in Blockbuster Data Center M&A Deal

After years of consolidation and mergers, there are still big deals to be done in the data center industry.

Blackstone Infrastructure Partners will acquire QTS Realty Trust for $78 a share and take the company private, the two companies said today. That values QTS at approximately $10 billion, the companies said, including $6.7 in equity and the balance in the assumption of QTS’ debt. The all-cash deal represents a 21 percent premium to Friday’s closing price for QTS shares. Interestingly, the deal includes a 40-day “go to shop” period in which QTS can field offers from other potential suitors.

The valuation on the deal is the largest in the history of the data center industry, topping Digital Realty’s acquisitions of Interxion ($8.4 billion) in 2019 and DuPoint Fabros Technology ($7.8 billion) in 2017, which also included the assumption of debt.

QTS operates more than 7 million square feet of data centers in in 20 markets across North America and Europe, including large data center campuses in Northern Virginia, Chicago, Dallas, Atlanta and Portland. These large campuses position QTS for continued growth opportunities with hyperscale customers, who accounted for 50 percent of QTS leasing in the first quarter of 2021.

Blackstone is a global investment firm and a significant player in the data center industry, but has done much of its investing through joint ventures with companies like COPT and stakes in global companies like Ascenty in Brazil. For Blackstone, buying QTS is a much larger bet on the future growth of the data center industry.

“QTS aligns with one of Blackstone’s highest conviction themes – data proliferation – and the required investment makes it well suited as a long-term holding for our perpetual capital vehicles,” said Greg Blank, Senior Managing Director, Blackstone Infrastructure Partners. “We are committed to a strong, lasting partnership, leveraging Blackstone’s scale, reach, resources and access to capital to drive long-term growth at QTS.”

Unlocking ‘Next Level Growth’

QTS said that Blackstone can invest in its operating platform and “take QTS to the next level of growth.” The deal gives QTS an owner with deep pockets to fund data center construction and management technology, as well as a network of potential partners and customers across Blackstone’s investment universe.

“We are confident this transaction is the right step to achieve our strategic objectives in our next phase of growth,” said Chad Williams, Chairman and CEO of QTS. ““We see a significant market opportunity for growth as hyperscale customers and enterprises continue to leverage our world-class infrastructure to support their digital transformation initiatives.”

The deal is expected to close later this year, and the companies “expect that QTS will continue to be led by its senior management team”  and keep its headquarters in Overland Park, Kansas.

Major M&A action was one of the trends DCF highlighted in our 2021 forecast (Eight Trends That Will Shape the Data Center in 2021), in which we predicted “a big year for data center mergers and acquisitions, including some larger transactions.”

Blackstone is among the large investors focused on the data center industry and the growth of the digital economy. Global firms investing in the sector include Goldman Sachs, KKR, GI Partners, Brookfield, Bain Capital,  Macquarie, and GIC.

Selling Points for QTS

A key attraction for these investors is the growth of hyperscale computing, which features long-term leases by the world’s largest and most credit-worthy technology companies. They also like major markets, and none more than Northern Virginia, home to the world’s largest concentration of cloud computing infrastructure. That includes Blackstone, which acquired a majority interest in eight fully-leased hyperscale data centers in Northern Virginia through a joint venture with COPT.

QTS has had considerable success in Northern Virginia since it entered the market in 2018, filling its first 36-megawatt data center in Ashburn and leasing 8 megawatts in a new 42-megawatt data center on a nearby campus. QTS owns additional land in Ashburn, offering considerable runway for future data center projects. It also has a campus in Manassas in Prince William County with one fully-leased hyperscale data center and the land to build several more. All told, QTS  has the ability to build more than 215 MWs of capacity in Northern Virginia.

The company’s growth in Northern Virginia was part of a 2018 restructuring to focus on hyperscale computing and cloud on-ramps.  QTS shifted its development focus, moving beyond the retrofits of mega-scale industrial facilities that characterized its early growth to focus on ground-up construction in the nation’s largest markets. QTS continues to be the largest player in the Atlanta data center market, and has also developed hyperscale campuses in Chicago, Dallas and the growing cloud hub in Hillsboro, Oregon.

To support its hyperscale growth, in 2019 QTS announced a joint venture with Alinda Capital, which bought a 50 percent interest in the Manassas project. The companies described their relationshiop as a strategic partnership in which Alinda would invest as much as s $500 million in future QTS projects.

QTS gained traction during the pandemic as customers embraced the remote management tools in the QTS Service Delivery Platform (SDP). The company recently expanded these services to provide tools giving customers easy access to more cameras, sensors and KVM (keyboard, video, mouse) management tools. The SDP tools positioned QTS to offer more customer management options after the COVID-19 pandemic prompted data center operators to restrict their access to facilities.

“QTS is a leading provider of data center solutions with a portfolio of high-quality assets in desirable markets, positioning it well to capitalize on these powerful trends in the data center space,” said Tyler Henritze, Head of Acquisitions Americas for Blackstone Real Estate. “We believe the vast expertise across our business will enable the QTS platform to succeed over the long-term.”