Hungry For Growth, Data Center Firms Ride The SPAC Boom

With billions flowing into special purpose acquisition companies since the beginning of this year, the SPAC boom has swept into digital infrastructure with data center firms organizing as SPACs to fuel growth and drum up broader investor interest. 

The SPAC frenzy is expected to continue further into 2021, as SPACs have already collectively raised close to $70B this year, according to SPAC Insider. SPACs have also outnumbered traditional IPOs. 

Cyxtera Technologies, the largest privately held colocation and interconnection provider in the world with a footprint of 61 data centers in 29 markets, has joined the frenzy. Last month, the company announced its merger with Starboard Value Acquisition Corp., a SPAC, in a transaction worth $3.4B. The combined entity will be the third-largest publicly traded colocation and interconnection provider, having reported revenue of $690M in 2020, and will trade on the Nasdaq index.

The deal is intended to “drive high-margin growth by increasing utilization of our existing assets, developing innovative product offerings, and expanding our global footprint,” Cyxtera CEO Nelson Fonseca said in a statement.

Cyxtera, which specializes in retail rather than wholesale colocation, has more than 2,300 customers including Cognizant, Cloudflare, Fujitsu, HPE and Nvidia. On a call with investors, company executives said they’re aiming to challenge the dominance of Equinix, the largest retail-centric colocation provider, by tapping the public markets.

“We are already in a privileged position among our peers, and that view is supported by top industry analysts,” Fonseca said on a recent call with investors. “We believe retail colocation is the sweet spot in the industry and is best positioned for accelerated growth. Retail colocation data centers operate as marketplaces, serving multiple enterprise and service provider customers per facility.”

Cyxtera isn’t the only data center player tapping a wider range of investors through a SPAC. Gary Wojtaszek and Kevin Timmons, former CEO and chief technology officer of CyrusOne, are reportedly involved in a planned digital infrastructure SPAC that InterPrivate, a private equity firm, plans to spin off. According to Bloomberg, the firm plans to spin off three SPACs, one of which is focused on digital infrastructure, and raise $600M for the effort.

Last month, a SPAC called Power & Digital Infrastructure Acquisition, which plans to target energy, electrical grid assets and other high-density consumers, also filed to go public on Nasdaq. That company aims to raise $250M in its offering.

“There’s a lot of capital looking for an edge today,” said Peter Lewis of real estate investment firm Wharton Equity Partners. “Today, because of where interest rates are, and other factors, there’s a lot more liquidity ... there’s an optimistic euphoria and search for gains that the market has gotten used to.”

As opposed to a standard IPO, SPACs offer a few advantages: They can be done more quickly, and with fewer disclosures, than the traditional route of teaming up with investment banks to underwrite shares and conducting roadshows to market the offering.

They also enjoy a halo of hype right now — the trend has even spawned a crop of celebrity SPACs involving Golden State Warriors star Steph Curry, musician Jay-Z and a number of others — and are turning heads among retail investors that may not otherwise be aware of the underlying business. Retail investors should proceed with caution in SPACs, Lewis said.

The trend “isn’t going to last,” he said, and less sophisticated investors may be left holding the bag if some of those entities fall short of promises.

In the data center space, the SPAC trend marks a convergence of a strong investor appetite for digital infrastructure assets and an advantageous environment for those sponsoring the deals. For data center firms with ambitions to capitalize on the digital infrastructure boom, the deals bring an infusion of necessary cash to capture more of the booming market.

For its part, Cyxtera is aiming for “substantial” growth through its public market offering, Fonseca said. Among other priorities, it’s looking to grow its base of federal government customers, expand its existing footprint in the London, Singapore, Chicago and Silicon Valley markets, and pursue M&A to gain a foothold in new geographic markets in Europe, Asia and Latin America.

“You have sponsors of the REITs, who have advantageous terms ... so for not a lot of money, they can acquire a large interest in a company and not at tremendous risk,“ Lewis added. “It is a good deal with respect to getting liquidity.”