Digital Realty to Buy Telx in $1.9B Deal

Data center player Digital Realty has agreed to buy rival Telx in a deal worth about $1.9 billion, as it looks to expand its presence in the market for colocation services.

Telx Group Inc. looked after about 1.3 million square feet of data center space across 13 US markets in March this year, leasing 11 of the 20 facilities it uses from Digital Realty, which says the acquisition will double its colocation footprint.

The move signals something of a strategic shift for Digital Realty Trust Inc. , which has previously focused on larger wholesale deals.

Colocation allows customers to rent space by the rack, if they so desire, and is growing in popularity as organizations look to outsource some of their IT needs.

Telx is currently owned by private equity players ABRY Partners and Berkshire Partners, which are selling the company for $1.886 billion and expect the transaction to close later this year.

Besides boosting its colocation presence, Digital Realty is keen to get hold of the interconnection platform developed by Telx, saying this will provide opportunities for future growth.

Digital Realty is planning to provide more details about the deal during its second-quarter earnings call -- scheduled for July 30 -- but expects the takeover to be "accretive to 2016 financial metrics."

The company, which operates data centers across North America, Europe and Asia-Pacific, reported sales of $1.62 billion in 2014, 9% more than in 2013, but saw net income fall by 37%, to $203,415, due to write-downs on properties in St Louis, Boston and Sacramento.

It also looks highly leveraged, reporting a net-debt-to-adjusted-EBITDA ratio of 4.8 at the end of 2014.

Despite that, Digital Realty appears to have secured a fresh commitment from a syndicate of lenders for a $1.85 billion loan, and says this will be available to fund part of the acquisition of Telx.

In addition, it has priced a public offering of 10.5 million shares at $68 per share and plans to use proceeds to support the move for Telx.

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"Telx's well-established colocation and interconnection businesses provide access to two rapidly growing segments with long-standing customer relationships in top-tier metropolitan areas such as New York and Silicon Valley," said Arthur William Stein, Digital Realty's chief executive, in a company statement.

"The fact that more than half of Telx's 20 facilities are run out of Digital Realty properties further highlights the strategic fit as well as the potential incremental revenue opportunities we expect to be able to pursue as one company on a global basis," he added.

The announcement comes several weeks after Equinix Inc. (Nasdaq: EQIX), another US data center business, agreed to pay £2.3 billion ($3.6 billion) for TeleCity plc (London: TCY), a smaller player based in the UK, to create Europe's biggest data center company.

Telecity had previously made a bid for Dutch data center business Interxion , but the more attractive offer by Equinix scuppered that arrangement. (See Equinix Confirms $3.55B Bid for UK's Telecity.)

Equinix is one of the world's biggest colocation providers and is likely to be one of Digital Realty's chief rivals following the move for Telx.

— Iain Morris, , News Editor, Light Reading