In a major development in the data center REIT market, Digital Realty Trust, Inc. (DLR - Free Report) announced on Jun 9 that it is set to acquire DuPont Fabros Technology, Inc. . The buyout will be an all-stock transaction for an enterprise value of about $7.6 billion, including $1.6 billion of assumed debt.
This move would enhance Digital Realty’s portfolio in the top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley. It is also anticipated to be immediately accretive to financial metrics.
Shares of DuPont Fabros were up 9.83% during Friday’s regular trading session.
The Deal Terms
Per the deal, for each share of DuPont Fabros, its shareholders would receive a fixed exchange ratio of 0.545 Digital Realty shares. Based on Digital Realty’s Jun 8 closing, this values DuPont Fabros shares at $63.60 each, denoting a premium of around 14.9% considering the latter’s closing price on the same day.
Further, based on DuPont Fabros' 77.8 million shares outstanding as of Apr 2, per Thomson Reuters data, the equity value of the deal comes at around $4.95 billion.
Approved by the boards of directors of both Digital Realty and DuPont Fabros, the deal now awaits approval of DuPont Fabros and Digital Realty shareholders, as well as other customary closing norms. The transaction is expected to close in the second half of 2017.
The Deal Benefits
The acquisition of Washington, D.C.-based DuPont Fabros, operating 12 data centers in three major U.S. metro areas, spanning total 3.5 million gross square feet and 301.5 megawatts of available critical load, would significantly boost Digital Realty’s capacity to serve the top metro areas in the nation. Digital Realty already boasts 145 properties across 33 global metropolitan areas.
Further, the DuPont Fabros buyout would help Digital Realty reinforce its hyper-scale product offering, as well as grow the blue-chip customer base. In fact, the combined company would have investment grade or equivalent customers representing over 50% of total revenue. Reputed companies like Facebook Inc. (FB - Free Report) and Yahoo Inc. would rank among its top 20 customers.
Additionally, DuPont Fabros currently has six data-center development projects under construction, which are 48% pre-leased. Situated in Ashburn, Chicago, Santa Clara and Toronto, where Digital Realty is currently present, the development pipeline offers scope for external growth.
Moreover, the merger of the two companies offers potential to realize up to $18 million of annualized overhead savings. It would help strengthen Digital Realty’s balance sheet and the combined company is anticipated to have the highest EBITDA margin of any U.S.-based publicly-traded data center REIT, per the company’s press release.
With growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data center REITs are experiencing a boom market. In fact, demand has been outpacing supply in top-tier data center markets and despite enjoying high occupancy, these are absorbing new construction at a faster pace.
Additionally, according to a Cisco forecast, global data center to data center IP traffic is expected to witness a compound annual growth rate of 32% over the 2015–2020 period. Furthermore, per Gartner reports, worldwide IT spending growth is projected to increase 3.3%, while worldwide server shipments are expected to rise 4.6% in 2017. These, along with an improved outlook for economic growth, are anticipated to drive demand for data centers.
Digital Realty is also expected to ride on the growth curve backed by its strategic acquisitions. Apart from the DuPont Fabros buyout, for which it obtained a fully committed bridge loan facility from BofA Merrill Lynch and Citigroup Inc. (C - Free Report) that will be available, if required, to finance the transaction, the company has also made diligent acquisitions in the past.
This included the acquisition of Telx in Oct 2015 and a portfolio of eight high-quality, carrier-neutral data centers in Europe (Amsterdam, Frankfurt and London) from Equinix Inc. (EQIX - Free Report) in Jul 2016. Such acquisitions offered a leading colocation and inter-connection platform, a superior connectivity infrastructure and better growth scope in attractive locations.
Currently, both Digital Realty and DuPont Fabros carry a Zacks Rank #3 (Hold).
Moreover, year to date, shares of Digital Realty climbed 15.3%, while that of DuPont Fabros increased 38.4% and outperformed the Zacks categorized REIT and Equity Trust – Other industry’s gain of 4.1%.
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