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Data Center REIT Merger Frenzy Sees CyrusOne Go Private in $15 Billion Deal

CyrusOne (NASDAQ: CONE) has agreed to a buyout deal: Private equity giants KKR (NYSE: KKR) and Global Infrastructure Partners (GIP) are paying a total of $15 billion for the data center real estate investment trust (REIT). The agreement ends weeks of speculation that the REIT was about to get acquired.

The transaction is the third one this year (and the second one Monday) involving a data center REIT. This flurry of activity will dramatically alter the landscape of the data REIT sector.

Image source: Getty Images.

Details on the deal

News first surfaced that CyrusOne was pursuing a sale in late September, when Reuters reported that the company was exploring strategic alternatives. Analysts believed that a deal seemed likely after speaking with industry contacts who suggested that the company had attracted several serious bidders willing to meet its asking price. In addition to KKR and GIP, The Wall Street Journal recently reported that Brookfield Asset Management (NYSE: BAM) was also in advanced talks to acquire CyrusOne.

In the end, the REIT agreed to a deal with KKR and GIP, which are paying $90.50 per share in cash for it. That's a 25% premium to the company's trading price before the Reuters story broke in September. Overall, it values the company at $15 billion, including the assumption of debt.

What's the draw of CyrusOne?

Data center operators have been a hot commodity this year. Blackstone Group (NYSE: BX) started the feeding frenzy by taking QTS Realty private in a $10 billion deal. That deal aligned with one of Blackstone's highest conviction investment themes: data proliferation. The private equity giant believes it can leverage its scale, reach, resources, and capital to expand QTS' footprint and take advantage of the rising demand for data centers.

The CyrusOne deal has a similar ring. KKR and GIP are acquiring it to gain a foothold in the fast-growing data infrastructure market. They also believe they can leverage their global resources and access to capital to support CyrusOne's ability to expand its footprint across key global digital gateway markets. In the process, the private equity funds believe they can earn a high return for their investors even though they're paying a hefty premium for the REIT.

The data center REIT shake-up

These deals will dramatically alter the make-up of the data center REIT sector. If the CyrusOne and CoreSite Realty (NYSE: COR) deals close, only two publicly traded data center REITs will remain: Equinix (NASDAQ: EQIX) and Digital Realty (NYSE: DLR). They're both behemoths with market caps above $45 billion. That makes it seem unlikely that they'll draw any takeover interest, especially since they've been consolidators in the sector. According to reports, Digital Realty was one of the bidders interested in CoreSite Realty.

While investors will have fewer data center REIT options to choose from in the near term, that could change in 2023, when Switch (NYSE: SWCH) intends on converting into a REIT. That assumes, of course, that one of the losing bidders in this recent consolidation wave doesn't set its sights on that founder-led data center operator and pick it up first.

Another interesting aspect of the recent industry shake-up is that infrastructure REIT American Tower (NYSE: AMT) emerged as the winner of the CoreSite auction, agreeing to acquire the data center REIT for $10 billion. That transformational deal will make it a communications real estate leader with a global tower portfolio and U.S. data center operations. This integration follows the blueprint of Brookfield Asset Management, which is building a global data infrastructure platform with data centers, towers, and fiber offerings. That model could spur more cross-consolidation among infrastructure and data center REITs.

The data infrastructure merger wave continues

Data usage is growing briskly, supporting the need for new digital infrastructure. Both private equity giants and strategic players are angling to upgrade their portfolios to take advantage of this long-term trend. Because of that, the industry's consolidation wave may not be over.

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Matthew DiLallo owns shares of American Tower, Brookfield Asset Management, CyrusOne, Digital Realty Trust, Equinix, and Switch. The Motley Fool owns shares of and recommends American Tower, Brookfield Asset Management, CyrusOne, Digital Realty Trust, Equinix, and Switch. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV and KKR. The Motley Fool has a disclosure policy.


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