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Analysts Skeptical On Rackspace Go-Private Chatter

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Analysts remain skeptical of a Rackspace Hosting (NYSE: RAX) rumor that the company could take itself private.

Following shares gaining 6.3 percent on Wednesday, Needham and Nomura question the source and discuss potential acquisitions.

The Rumor

On Wednesday, TechCrunch author Ingrid Lunden reported that Rackspace's hiring of strategic advisors could help the consider partnerships, a potential acquisition, and even, taking itself private.

"Following the likes of Dell in turning away from public market accountability while it focuses on developing its business in a fast-changing tech world, we have heard from a source that Rackspace has been negotiating with a private equity firm to borrow capital for the deal, with a plan to make an official announcement as soon as this week (keep in mind that we're hurtling to a public holiday in the U.S.)."

Lunden noted that Rackspace has had at least three acquisitions bids, including buy-out offers from Hewlett-Packard and International Business Machines. Analysts have also suggested that CenturyLink, Cisco, EMC and Dell could also possibly bid.

The HP offer valued the company at $43.00 per share, but Citigroup sees offers of $44.00 to $45.00 per share.

TechCrunch concluded, "It's also a fair enough argument for taking the company private — to move Rackspace away from the “fickle” public market consensus, as one observer has described a potential delisting scenario."

Lunden acknowledged that its sources are unconfirmed.

Needham & Co. Questions TechCrunch's Validity

Following the TechCrunch piece, Needham analyst Richard Kugele remarked that other news sources have challenged Lunden's article. Dealreporter/ Mergermarket questioned the "unsubstantiated" information.

Kugele believes "that a deal will be challenging given the company's valuation (6-7x '15 EBITDA), shrinking list of potential buyers and lack of IP differentiation. For the time being we reiterate our Hold on the possibility we are wrong (HP, for example, does need to “play catch up” in the cloud). However, we point out that the stock is up around 25% on takeout speculation alone, creating significant headline risk (ie. Friday, when a Dealreporter article noting lack of interest from potential suitors sent the stock down 7%+)."

In an earlier note, Needham reported that IBM is not interested in acquiring Rackspace following IBM executive Lance Crosby's comments.

Nomura Does the Math

Nomura analyst Adam Ilkowitz used the HP offer of $43.00 per share price for the baseline of its LBO model. Ilkowitz wrote, "Assuming $1bn from private equity and Chairman Graham Weston rolling over his 12% equity stake, we believe >20% IRR could be achieved over five years."

Nomura has Neutral rating and $39.00 price target on Rackspace

Stock Action

Shares of Rackspace closed Thursday at $35.86, down 0.06 percent.

Latest Ratings for RAX

Nov 2016Deutsche BankTerminatesEqual-Weight
Aug 2016Raymond JamesDowngradesMarket PerformUnderperform
Aug 2016Tigress FinancialDowngradesStrong BuyNeutral

View More Analyst Ratings for RAX
View the Latest Analyst Ratings

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