Digital Realty Acquiring Telx in $1.9B Deal

Digital Realty announced it will acquire Telx for $1.9 billion. The combination is expected to double Digital's colocation footprint, as well as provide Digital customers access to Telx's interconnection platform.

Fitch Ratings, one of three nationally recognized statistical ratings organizations, accidentally leaked Digital Realty Trust’s acquisition of Telx for $1.9 billion Monday morning. While the deal has been rumored for a few months, neither company had formally announced the transaction at the time. This morning, Digital Realty issued an official release announcing the deal.

Digital Realty Trust is a Real Estate Investment Trust (REIT) predominantly involved in large wholesale data center deals while Telx has made its name in retail colocation and interconnection. The deal greatly increases Digital's play in retail colocation, with Telx's strength in interconnection a large part of the appeal.

"Connectivity in general has been growing in importance, particularly for enterprises and cloud/IT providers (Digital Realty’s target customers) and since Telx was already in several Digital facilities, this buy makes sense strategically,” said Kelly Morgan, research director multi-tenant data centers, 451 Research. "We wonder if it will lead to further acquisitions in the interconnection space, however: Now that Digital Realty is gaining a platform and interconnection capabilities in the US, perhaps it will look to add to its portfolio elsewhere in the world.”

Telx manages over 1.3 million square feet of data center space across 20 facilities, two of which are owned by Telx. The company already leases around a dozen of its facilities from Digital Realty, with six facilities leased in third parties.

On Monday morning, Fitch Ratings put out an opinion affirming Digital Realty’s bond ratings in light of the takeover. Other details provided by Fitch included news that Digital Realty will issue $700 million of equity and $1.2 billion in debt to pay for Telx. The opinion was quickly retracted, reported Forbes, but nothing ever really leaves the Internet.

A report earlier this month by Reuters citing anonymous sources pegged the potential deal at more than $2 billion.

Consolidation is occurring in the data center space, with the top three providers all active in M&A. Equinix announced a plan to acquire TelecityGroup in Europe in May, breaking up a merger between Telecity and another European provider Interxion. Digital Realty's acquisition of Telx means it now more directly competes with Equinix.

Also in May, Digital’s rival QTS acquired Carpathia Hosting, a provider that does a lot of business with US government agencies. In April, CyrusOne, another rival, acquired Cervalis for $400 million, expanding its presence in the New York market as well as its financial services customer base.

New York-based Telx is a private company owned by private-equity firms ABRY Partners and Berkshire Partners. The acquisition fits strategically with Digital’s recently renewed focus on services beyond its core wholesale data center business, however, Digital and Telx are different businesses at their cores.

"This transformative transaction is consistent with our strategy of sourcing strategic and complementary assets to strengthen and diversify Digital Realty’s data center portfolio and expand our product mix,” said Digital Realty chief executive officer A. William Stein in a press release.

Synergy Research recently discussed the potential acquisition, touching upon the different nature of each company’s business. “While there will always be something of a blurry demarcation line between retail and wholesale, at their heart, these are two market segments with differing characteristics which have different business metrics and require somewhat differing skill sets,” said Synergy chief analyst and research director John Dinsdale earlier this month.