Pacific Crest Likes Equinix, Telecity Combo: Is InterXion Now In Play?
On Sunday, Pacific Crest analyst Michael Bowen published a report titled "May We Cut In…" raising its Equinix Inc (NASDAQ: EQIX) target price based upon the confirmation by Equinix of its intention to close the previously announced, approximately $3.6 billion TELECITY GROUP PLC (OTC: TLEIY) acquisition.
Global interconnection giant Equinix has recently received IRS approval for its REIT conversion, making it the sixth U.S.-based, publicly traded data center REIT.
Equinix has traded in a 52-week range of $180.37 to $270.52 per share and currently pays out a dividend yielding 2.5 percent.
InterXion: What Next?
In turn, this leaves European data center operator InterXion Holding NV (NYSE: INXN) with an open dance card, and potentially as an acquisition target themselves.
Bowen suggested that Digital Realty Trust, Inc. (NYSE: DLR) and CoreSite Realty Corp (NYSE: COR), among others, may be potential suitors for Amsterdam-based InterXion in order to bolster their European data center footprint.
The InterXion data centers are network dense and located across key European cities. If InterXion were to be acquired under similar financial terms as the deal for Telecity, it would imply a mid-$30s acquisition valuation for InterXion, according to Bowen.
Equinix + Telecity At A Glance
1. The Deal
2. Acquisition Rationale
3. By The Numbers
4. Combined European Footprint
5. Equinix Growth: Acquisition History
Pacific Crest On Equinix Business Model
Bowen's positive Equinix thesis noted:
- 1. "Neutral colocation providers increasingly sit at the intersection of public, private and hybrid cloud solutions as enterprises move to outsource more of their respective IT requirements."
- 2. "All data centers are not created equal: retail colocation providers generate higher monthly recurring revenue (MRR) per square meter than wholesale data centers."
- 3. "Startups are moving from public cloud solutions and enterprises are moving off-premise to Equinix at the higher end of retail colocation."
Pacific Crest–Equinix: Overweight Rating, PT Increased $275 To $295
The new $295 target price represents a potential 10 percent upside from the prior close of $268.07 per share, a total return of 12.5 percent including the dividend yield.
- Rationale: The PC base case $295 PT is based upon "a conservative and unchanged" 2016E P/AFFO of 15.8x its pro forma $18.59, as well as a 10-year discounted cash flow analysis.
- Expectations: Bowen noted, "Equinix stated that the company should be able to achieve a long-term adjusted EBITDA margin of 50 percent, which implies significant room for improvement from Equinix's current 46.2 percent and Telecity's current 47.8 percent, but importantly is consistent with our current long-term EBITDA projections."
- Other Expectations: "Equinix expects its net debt/adjusted EBITDA to be 4.5x, and while this is above its 3x–4x target range, management believes it will quickly move back down within that range due to the natural deleveraging impact of its model," according to Bowen.
Pacific Crest's Bottom Line
Bowen pointed out that "due to U.K. takeover provisions, few specific details could be provided regarding revenue, cost synergies or ultimate projected impact to AFFO or other metrics."
However, the following rationale provides a foundation for the Pacific Crest base case:
- 1. "Large customers should increasingly be attracted to deploying on Equinix's network because they can connect to a larger ecosystem that could not be achieved if connecting through competitors.
- 2. "In addition to revenue synergies, Equinix should see synergies in operating and capital spending through optimizing G&A expenses, improving capital efficiency and gaining greater access to capital.
- 3. "The combination can produce post-deal AFFO/share accretion of an estimated 7 percent in 2016 and 8.5 percent in 2017."
Pacific Crest believes that Equinix "management's initial assertion of AFFO breakeven within 12 months after the deal closes is likely conservative."
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Latest Ratings for EQIX
|Dec 2016||Guggenheim||Initiates Coverage On||Buy|
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