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Equinix to Tap Asia-Pacific Cloud Demand with Bit-isle Buyout

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In a move to strengthen its position in the Asia-Pacific region, Equinix Inc. (EQIX - Free Report) recently revealed its plan to acquire a Japanese outsourcing firm, Bit-isle Inc. The data center operator has commenced a cash tender offer through its Japanese subsidiary for all issued and outstanding shares of Tokyo-based Bit-isle.

Equinix will offer JPY922 a share to Bit-isle shareholders which translates to a total of JPY33.3 billion or approximately $280 million. The tender offer will run through Sep 9 to Oct 26, unless extended further.

By leveraging Bit-isle’s strong local presence, Equinix will be able to further penetrate the Japanese and broader Asia-Pacific region, which, is currently one of the fastest growing markets. Notably, the company currently generates approximately 18% of its revenues from the Asia-Pacific region.

Bit-isle’s board of directors has approved the cash tender offer. However, Equinix will have to acquire at least 66.67% of the company’s shares during the tender period. Bit-isle’s major shareholders — Warehouse Terrada, Kohei Terada and Yasunobu Terada — have agreed to tender their shares totaling 29.74%.

Under Japanese corporate law, Equinix will have to meet all the offer conditions before it can acquire Bit-isle. The deal, expected to be completed in early 2016, will be accretive to Equinix's adjusted funds from operations (AFFO) per share.

Equinix received a one-year senior bridge term loan facility from the Bank of Tokyo-Mitsubishi to fund the takeover. Following the announcement, the world’s number one data center operator’s shares gained nearly 3.5% in yesterday’s trade.

Founded in 2000, Bit-isle specializes in offering outsourced IT services to over 650 customers through six data centers in Japan — five located in Tokyo and one in Osaka.

Further, in terms of revenues, Bit-isle is the 7th largest data center operator in Japan, while Equinix holds the 15th position with 300 customers and five data centers. Post acquisition, the combined revenues will catapult Equinix to the fourth position with 11 data centers.

Why Focus on Asia Pacific?

We believe that the expansion of data centers will strengthen Equinix’s portfolio in one of the major global trade hubs and financial centers. Moreover, the company’s recent expansions in Japan are in sync with its strategy of boosting its presence across the Asia-Pacific region and addressing the rising demand for cloud services. Notably, earlier this year, Equinix opened IBX data centers in Singapore and Hong Kong to further expand its footprint in the region.

The increase in demand is also evident from the reports of independent research firms. According to technology research firm, Gartner, Asia-Pacific is likely to witness the highest growth rate in the entire public cloud services market and reach $7.4 billion in 2015, up 14.2% from $6.5 billion in 2014. Additionally, Gartner predicts that the total cloud services spending in Asia Pacific and Japan will touch the $11.5 billion mark by 2018.

The Gartner report also stated that the emerging markets, including India, Indonesia and China, will witness solid growth while the mature markets such as Australia, Japan, New Zealand, Singapore and South Korea remain stable. The increase in public cloud services would automatically boost data center demand.

Conclusion

Expansion in important markets and consolidation of facilities in the existing ones has been part of Equinix’s core strategy. The company is continuously striving to boost its revenue base as well as profitability by improving the technology to attract clients. Moreover, the recurring revenue model has provided the much-needed support to the company’s revenue stream over the years. The company’s cloud and IT service businesses are its fastest growing segments and account for approximately one fourth of the total revenue.

Equinix remains positive on the growing demand for data centers driven by the Big Data exchanges. To meet this demand, the global interconnection and data center company is expanding its IBX data centers globally and gaining popularity among tech companies looking for data management. Thus, the company expects its total addressable market for retail data centers to increase at a CAGR of 8% from 2013 to 2017 and reach $24.0 billion. Based on this projection, the company estimates a 10% revenue growth rate through 2017.

Nonetheless, Equinix competes with Internet data centers operated by established communications carriers like AT&T (T - Free Report) , Level 3 Communications and Verizon Communications (VZ - Free Report) .

Moreover, the telecommunication industry is currently undergoing consolidation. As customers combine businesses, they may require less co-location space, and fewer networks may be available to choose from. In addition, increased utilization of existing co-location space could reduce the attractive expansion opportunities available to Equinix.

Currently, Equinix has a Zacks Rank #3 (Hold).

 

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