SPACs Target Investment in Digital Infrastructures

A new round of M&A on the horizon

The rise of special purpose acquisition corporations-also known as SPACs-is bringing more investment dollars into the digital infrastructure sector, signaling a new round of mergers and acquisitions (M&A) on the horizon.

A SPAC is an investment vehicle that goes public and raises capital from investors for the purpose of acquiring a private company. Most SPACs are backed by an investment company and assemble a team of advisors and executives to manage the acquired property.

Data centers have been a favored asset class for investors in recent years, with strong performance by public data center developers, and an influx of cash from infrastructure investors backing private operators.

SPACs offer yet another way for large financial firms to gain exposure to the market for digital infrastructure, which is experiencing extraordinary demand for capital to fuel the data economy. The data center business is positioned to benefit from a range of emerging technologies including AI, the Internet of Things, 5G wireless, augmented reality and autonomous cars.  

An early example of the trend was the 2020 acquisition of Vertiv by GS Acquisition Holdings, a SPAC created by Goldman Sachs and veteran executive David Cote.

In February, colocation specialist Cyxtera Technologies revealed its plans of becoming a public company through a merger with a SPAC sponsored by investment firm Starboard Value. The deal places a $3.4 billion valuation on Cyxtera, which will be listed on the NASDAQ exchange.

SPACs provide additional exit options for privately-held data center companies, and could be especially attractive to those contemplating IPOs. Some analysts see selling to SPACs as a faster and more efficient path to the public markets than a traditional IPO. The SPAC route also offers more control over pricing on equity sales, as opposed to the last-minute, demand-based pricing for IPOs.

Rich Miller, Editor, Data Center Frontier

The Cyxtera transaction offers some insights into how SPAC acquisitions can offer an exit opportunity and growth path for digital infrastructure companies. “We always wanted and expected to be a public company, because of the scale of our platform,” Nelson Fonseca, CEO of Cyxtera said in an interview with Data Center Frontier. “We were on the path to an IPO later this year, but Starboard’s interest accelerated our ability to go public.”

Jeff Smith, Chair of SVAC and CEO of Starboard Value, says Cyxtera is at an “inflection point” with upside opportunities in both, organic growth and acquisitions. “We’re actually investing in Cyxtera a few years since the carve-out (from CenturyLink, the previous owner of the data center portfolio), after all the heavy lifting and the hard work has been done by this terrific management team.” The key to organic revenue growth will be filling Cyxtera’s data centers, which are currently at 67 percent of capacity. Boosting utilization to 85 percent would bring in an additional $170 million a year in EBITDA.

Some analysts see the explosion of SPACs as a sign of a frothy market. About 175 SPACs went public in the first two months of 2021, with about $32 billion being raised in February alone. Meanwhile, indexes that track SPACs declined about 20 percent in value in that month.

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