Investors: Asset Sales Reflect Telco Troubles, Not Colo Trends

HALF MOON BAY, Calif. – In 2011, telecom companies were major buyers of data center companies. Just four years later, they’re trying to sell many of the same data center assets. Is this a sign that colocation is hurting and the the party is over for the data center sector?

Investors and analysts say the moves are a reflection of trends in the telecom sector, and driven by the strong valuations of data center assets, rather than any worrisome slowdown in the colo and cloud business.

That’s the takeaway from several panels at the IMN Forum on Financing & Investing in Data Centers and Cloud Infrastructure, held last week at the Ritz Carlton Half Moon Bay.

Last month Windstream announced the sale of its data center business (the former Hosted Solutions) to TierPoint for $575 million. Last week CenturyLink said it was conducting a strategic review of its data center and colocation holdings, and could sell all of its portfolio, which includes assets assets once operated by Savvis, Qwest and Tier 3. Meanwhile, there are widespread reports that Verizon is seeking to sell its data center operation, including the Terremark business it acquired in 2011.

It’s A Telecom Thing

On recent earnings calls, securities analysts tracking data center REITs expressed concerns about whether the pending sales by telcos reflected a deterioration in the underlying businesses that could impact colocation providers and wholesale data center specialists.

At the IMN Forum, the consensus was that the colocation business remains healthy, and the sale efforts are tied to challenges faced by telecoms, who have been offloading infrastructure including wireless towers and fiber).

“These divestitures by Verizon and CenturyLink are corrections to a core strategy rather than indications of where the (colocation) market is going,” said Erik Levitt, who has a foot in both sectors as CEO of both Open Data Centers and 1stpoint Communications.[clickToTweet tweet=”Telco sales are corrections to a core strategy, not indications of where the colo market is going,” quote=”Telco sales are corrections to a core strategy, not indications of where the colo market is going,”]

“I don’t believe it’s fair to say Verizon wanting to sell Terremark is representative of any larger trend,” Levitt added. “Trying to shed the Terremark asset is consistent with Verizon’s larger strategy. Verizon is focused almost exclusively on wireless.”

High Valuations A Factor

A factor in the timing of the sales is the recent flurry of data center mergers and acquisitions, which have established strong valuations for these businesses – a trend also seen in recent trading of data center REITs on Wall Street.

“The need for growth drove deals to buy cloud, and now it’s about creating shareholder value,” said Tomer Yosef-Or, principal in ABRY Partners. “It is  a CapEx intensive business, and they’re looking at the valuations they can get.”

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Yosef-Or noted that his firm sold Hosted Solutions to Windstream in 2010 for $310 million. Last month Windstream sold the business to Tierpoint for $575 million, a gain of $265 million in five years.

To the extent that the data center sales are tied to performance, IMN panelists said those struggles are focused on the competitiveness of huge telecom companies.

“Once these (data center firms) entered a bureaucratic environment, they lost some of their edge,” said Yosef-Or. “Decision making became complicated and took longer, and other players in the market moved more quickly and took business from them.”

“The telcos are big and bureaucratic,” agreed Rob Stephenson, principal in 19 Technologies. “The Terremarks and NaviSites became incredibly frustrated. When they get built into these big-bolt telecoms, it became very hard for them to do what made them great.” NaviSite, a managed hosting provider, was acquired by Time Warner Cable in 2011.

Interestingly, Levitt predicted that some telecoms that are currently sellers could be data center acquirers again in certain scenarios. “Verizon may be interested in acquiring remote data centers for their wireless and edge data centers,” he said. “But Terremark is not an edge data center.”