It’s a new day for Vertiv, which this week announced plans to become a public company with a streamlined balance sheet and ambitions to become an even larger player in data centers and edge computing.
The Vertiv brand is only four years old, but it has a long history with the data center industry’s most familiar names, especially the Liebert line of power and cooling products.
The company starts a new chapter in its journey with Tuesday’s announcement that it will merge with an affiliate of Goldman Sachs, with renowned investor David Cote as its new executive chairman.
Current CEO Rob Johnson and the executive team will stay in place, and current owner Platinum Equity will retain a sizable stake. The deal assigns Vertiv an enterprise value of $5.3 billion.
The transaction positions Vertiv as an investment vehicle squarely focused on the growth of data centers – a rare “pure play” in the industrial equipment sector. That’s significant at a time when the world’s largest investors are targeting digital infrastructure, citing extraordinary demand for capital to fuel the shift to a data economy.
Cote, who engineered a major turnaround as CEO of Honeywell, loves the growth opportunity in the data center industry.
“Data is going to continue to explode,” Cote said in an appearance on CNBC. “You could almost call it freakish growth. All this data has to reside somewhere.”
Vertiv had nearly $4.3 billion revenue in 2018, with competitive products across the spectrum of data center equipment. Cote believes further sales growth is possible, but also sees a clear opportunity to improve Vertiv’s profit margins, which lag some of its key rivals.
The merger will also allow Vertiv to substantially reduce its debt load, which will position the company to expand through acquisitions. “The opportunity to de-lever now opens up opportunities,” Johnson told CNBC’s Jim Cramer. “Now we all know where we’re going. We have the dollars to pursue innovation and inorganic growth.”
Vertiv has a long history as a consolidator in the data center power and software sectors. Another M&A focus could be edge computing, which both Cote and Johnson highlighted as a growth opportunity.
“It’s the edge devices and latency-driven applications that are going to drive a proliferation of mini-data centers all over the place,” said Johnson.
The Vertiv Journey
Headquartered in Columbus, Ohio, Vertiv employs around 20,000 people and does business in more than 130 countries. It traces its roots to the 1965 founding of Liebert, a maker of computer room air conditioner (CRAC) units, which supply perimeter cooling for raised-floor data centers. Liebert was acquired in 1987 by Emerson Electric, which later formed Emerson Network Power (ENP) focus on the data center sector.
In 2015 Emerson announced plans to spin off Emerson Network Power, which was acquired by private equity firm Platinum Equity Group in a $4 billion transaction, and rebranded as Vertiv.
Platinum Equity has invested several hundred million dollars to restructure and streamline Vertiv’s operations to align with a changing environment.
After years of operating as part of the Emerson Electric conglomerate, Vertiv retooled as a nimbler company that could adapt its strategy and products. That task was crucial to its goal to support large, fast-moving colocation and cloud players, and the emerging opportunity in edge computing.
Platinum brought in Johnson, a partner in private equity firm Kleiner Perkins, to lead Vertiv into that future. Johnson is well known in the data center industry from his tenure as President and CEO of American Power Conversion, which for many years was Emerson’s primary rival in the power and cooling market.
Platinum invested $200 million in updating Vertiv’s software systems, including new CRM and ERP platforms. “Rob Johnson and the management team have done a tremendous job preparing the company for its next phase of growth,” said Tom Gores, Chairman and CEO of Platinum Equity.
In a recent report, 451 Research highlighted Vertiv’s progress under Platinum’s ownership.
“Vertiv has remade itself for a datacenter market that demands a lean cost structure and rewards speed,” wrote Daniel Bizo, Principal Analyst, Datacenter Services & Infrastructure at 451. “It had found these characteristics difficult before the spinoff and they ultimately contributed to its divestiture by former parent Emerson Electric. In stark contrast to the more cloudy projections just a few years ago, the company is now gearing up to take advantage of its broad portfolio and global footprint to take more share in a challenging but expanding data center market.”
Cote said that Vertiv “is exactly the asset we were looking for, with a great position in a good industry, products differentiated by technology, strong organic and inorganic growth potential, and opportunities for sustained improvements over time.”
The Opportunity Ahead
Becoming a public company means that Vertiv will be reporting its results. Documents released with the merger announcement provide a deeper look into how Vertiv assesses its strengths and opportunities.
Vertiv’s management believes it has the leading position in the $8 billion market for UPS systems, with about twice the market share of Schneider Electric and Eaton. Vertiv is also the largest player in the $3 billion market for thermal management (cooling), where it maintains a healthy lead over Stulz and Legrand.
The company’s largest addressable market is in services and software solutions, an $11 billion market where Vertiv believes it has a narrow edge over Schneider Electric.
On the acquisition front, Vertiv assesses the data center equipment sector as a “fragmented industry with opportunities for bolt-on M&A.” that includes companies and technologies that can extend its current products, as well as technologies like energy storage that could transform the way data centers provision power.
Vertiv is also focused on the edge computing opportunity, and retooling for a more agile data center landscape. It’s an effort that has involved extensive study of the emerging market, and how customers will use edge services. The resulting “archetypes” are guiding Vertiv’s edge strategy. Given the nascent state of the edge market, it’s likely that M&A opportunities will emerge over the next several years.
451 Research believes Vertiv has taken the steps to position itself for growth in a complex, fast-changing environment.
“As demand concentrates in the hands of a few hyperscale and international multi-tenant operators, so should more supply consolidate around major vendors over time, as pressure to scale and drive costs out of the supply chain builds up,” 451 reports. “We think Vertiv successfully adjusted to this new era and is positioned to be one of the successful consolidators if it can keep its product portfolio up to speed with technology shifts.”
It’s new backers and executive chairman are optimistic about Vertiv’s opportunity.
“If it comes across that I’m pumped up about this, it’s because I am,” said Cote.
The GSAH-Vertiv Transaction
In the deal announced Tuesday, Vertiv will be merged with GS Acquisition Holdings Corp,, an investment vehicle created by Goldman Sachs and Cote, which raised $690 million from investors in a 2018 IPO, and is listed on the NYSE as GSAH.
The transaction is expected to close in the first quarter of 2020, with the combined company trading as Vertiv Holdings Co. under the NYSE ticker symbol VRT. The $5.3 billion valuation is about 8.9 times the company’s estimated 2020 Adjusted EBITDA of $595 million.
Vertiv shareholders will be paid $415 million in cash, with the rest in shares of stock. GSAH will pay off much of Vertiv’s debt, with the amount based on a multiple of Vertiv’s 2019 adjusted EBITDA. Upon closing, the ownership of Vertiv will include:
- Platinum will own 38% of the combined business.
- Current shareholders of GSAH will own 20%.
- A 37 percent stake will go to investors in a $1.2 billion private placement to fund the deal and pay off debt.
- Sponsors Cote and Goldman Sachs will own 5 percent of the business, subject to a 1 year equity lock-up.