Fritzsche’s Forum

Is Cable Ready to Spend?

October 1, 2021

The September conference cycle is never dull and always full of interesting tidbits for those who really listen to the undercurrents of what CEOs and CFOs are saying. I have found that history has shown this time and time again in 20+ years of going into “September listening mode.”

One of the key themes this past month came from the cable sector. In short – cable may be down…but they are sitting back up. Comcast stock has struggled to find its footing since September 14th when its CFO previewed that broadband adds would be less than Street estimates. Specifically he noted they have seen a slowdown since late August in Broadband adds and growth would be down from the (record) Q3’19 levels. ATUS also previewed weaker than expected Q3’21 adds – now guiding to 15K – 20K in broadband losses (with plan to finish flat / slightly up on net adds for FY’21). Its stock has also felt some pain – down approximately 25 percent since September 1st.

The question is what is driving this weakness for cable? The CMCSA CFO acknowledged the times in the competitive front are indeed a changin’. Specifically he noted: “we’ve been mindful that competition’s coming in one of our best and favorite businesses, frankly, for quite some time.”

One of the things we have often discussed in our write-ups is that telecom has very much “woken up” to the need for more fiber. When telecos were not as much focused on broadband and fiber-deep, life was very good for cable. When I was an analyst one of the things I used to say was ‘never underestimate the cable cos’. Two years later, we would continue to say this.

In the September webcasts from the cable cos there seemed to be very purposeful messaging being sent. Perhaps this was best seen by listening to the cable Godfather himself, Brian Roberts (Chairman and CEO of Comcast). When asked about the balance sheet at the Goldman Sachs conference he made a notable point. Specifically, he said: “You’re going to have a lot of free cash flow and your first goal would be to invest in the business.” This tails off some comments from the CFO two weeks prior who noted: “We’re going to step on the gas a little bit….and continue to invest in the network on the path to DOCSIS 4.0 which will give us multi-gig speeds up and down.” This was not surprising, but what was surprising was the follow up to this statement. He went on to say: “no, no, no trigger other than that’s the path we want to get our business on and with the success of trialing 4.0 technologies in the last bunch of months….its for real and we want to get ourselves on the path to doing that.”

The “no other trigger” seems hard to me. The trigger is kind of hiding in plain sight, isn’t it? In the last nine months, AT&T, Frontier, Windstream, Consolidated, Lumen, Apollo and many many other smaller players (too many to list) have been spreading the “fiberized” gospel. And this will only be entering hyper-drive mode as a massive amount of broadband infrastructure capital enters the states’ pockets.

My guess is the history books will show that this past month will indeed be a “September to Remember” because it will mark the point where cable showed they are not backing down. They may have been hit, but they are no shrinking violet and if telecom is moving, cable is saying “game on – we are ready!”

The “Ferrari of Fiber” is Finally Coming out of the Garage

August 25, 2021

Last week, Lumen made an announcement which likely went unnoticed by many but offers hints as to the company’s purest ambitions.  On August 19th, they introduced Lumen Edge Private Cloud.  The new service includes compute, storage, network and security. It builds on the bare metal Edge Compute platform Lumen launched last year, VMware Cloud Foundation and software-defined data center technology. 


The service is expected to meet 95 percent of US enterprise demand within five milliseconds of latency. Lumen has 44 edge nodes deployed in the U.S.  The service is  also available to 2,200 third party data centers   via VMware Cloud on AWS. In a press call with reporters, CEO Jeff Storey noted this was a “unique opportunity to grow our enterprise business by leveraging our expansive fiber network … utilizing our edge computing network to move critical workloads closer to the source of data.”

In an interview with Fierce Telecom Chris McReynolds, Lumen’s VP of cloud edge product management said this is just the “first layer” of Lumen’s drive to stack up the edge infrastructure and discussed plans to launch a multi-tenant virtual machine and an edge orchestrator in early 2022. 


Why is this important?  Well, it represents a canary in the coal mine of things to come.   Don’t be surprised to see Lumen’s future press releases and talking points to very much center around the edge and their role in enabling it.  These talking points get easier to draft now that it is beyond the announcement it will sell 20 of its states to Apollo Global Management.  While that deal will take one year to close, the messaging as to what Lumen is going to be when it ‘grows up’ is much easier to craft now. 


Why is this important?  Well, it represents a canary in the coal mine of things to come.   Don’t be surprised to see Lumen’s future press releases and talking points to very much center around the edge and their role in enabling it.  These talking points get easier to draft now that it is beyond the announcement it will sell 20 of its states to Apollo Global Management.  While that deal will take one year to close, the messaging as to what Lumen is going to be when it ‘grows up’ is much easier to craft now.


The irony is not lost on me that if Level3 were still standing as a solo company, the press releases that we would have seen from them likely would have been a whole lot like the one we saw just last week.   Simply put, Lumen is boomeranging back to its old Level3 days at the perfect time.  In past reports I used to call Level3 the “Ferrari of Fiber.”  By detaching themselves from a good amount of their copper assets, that engine is poised to rev again!

Importantly, this fiber will be the basis for their enterprise and edge push.  A simple word search of the word “enterprise” in LUMN’s Q2’21 earnings call came up 28 times vs. only nine times for the word “consumer.”  Although Lumen likely will push hard on FTTH initiatives in the remaining states it owns post Apollo (management noted 15MM of the 21MM remaining homes it will keep in its region are investable), the lens in which these consumer projects are viewed will likely have some enterprise “pixie dust” to them.


At the Cowen conference, Maxine Moreau, Lumen’s President of Mass Markets, acknowledged as such when he said: “about 70 percent (of consumer homes) would be considered urban and suburban, which makes it the most attractive areas for investment because of the densification as well as the overlap with our enterprise business. We have a lot of network within Lumen and we can leverage that network as we expand our fiber.”  While it makes total sense, it is a subtle change of tone that should not go unnoticed.  The enterprise hand may be directing the consumer segment….under the “old” CenturyLink model it was quite the opposite.
 
Although many may think Apollo got the Lumen divested assets at an extremely low multiple given that FTTH is all the rage, there is an intangible benefit to Lumen that will pay (proverbial!) dividends overtime.  It gives Lumen nimbleness, removes the copper refrigerator from its back and (most importantly) allows it to be front-footed in its fiber lean in.  These are things it has wanted for a LOONNNGGG time – perhaps maybe even since November 1, 2017 – the day the Level3 merger closed! 

The DigitalBridge Coming Out Party

June 22, 2021

This is a big week for Analyst Days – with DigitalBridge on June 22nd (the day of its official rebranding) and Equinix (EQIX) on June 23rd.  Both will be important days for each as they both represent companies in significant transition right now.

For EQIX, this will be the first analyst day in three years and a lot of eyes will be watching.  As they do at all their analyst meetings (that typically occur every other year – COVID put a curveball in this schedule), EQIX is expected to put out longer term guidance (both revenue and AFFO / share growth).  In these past three years much has changed: Digital Realty (through the purchase of Interxion) has more than beefed up its interconnection capabilities and assets; QTS will be going private backed by the deep pocketed Blackstone; and EQIX itself has transformed its own stripes bringing in much more hyperscale capabilities through xScale and an edge play through the purchase of Packet.

And – true to form – EQIX is not sitting still during this period of transition.  On June 14th, GIC and EQIX added another $3.9B to expand the xScale Data Center Program.   The xScale portfolio of 32 facilities will provide more than 600 megawatts (MW) of capacity once fully built out.  In a recent Forbes article, EQIX’s CTO, Milind Wagle, was quoted as saying that Equinix is the “engine room of the digital economy.”  We agree completely. But the question becomes are their customers looking with a careful eye closely at the interworkings  of the engine room and does that engine room still have a thick moat around it as it did three years back?

For DigitalBridge (formerly known as Colony Capital as of Tuesday), we almost think of June 22nd as their coming out party in many ways.  Following its recent OED sale, DigitalBridge’s assets are now 80 percent in the digital infrastructure  space.  The only non-digital assets are Wellness Infrastructure and its public stake in CLNC.  DigitalBridge has a significant opportunity which few in the space has right now.  Why?  Because Ganzi and team have their hands in more parts of the digital infrastructure space than anyone.  These include (but are not limited to): small cell (ExteNet); fiber (ZAYO); data centers (Vantage and DataBank); land under the towers (Landmark); and towers (Vertical Bridge).  Importantly, the reach of some of these assets are not only US based.

If DigitalBridge can find a way to communicate how all these ‘children’ can play together  in the 5G infrastructure ‘sandbox’, that will be a message unique to DigitalBridge, given that others lack this breath and depth of asset mix.   Our guess is if any one can communicate that message it is Marc Ganzi! We will be watching!

LUMEN / T-MOBILE – On the Edge of Glory?

As a former analyst, I know that the webcasts which the Street pays the most attention to are the ones where the CFO or CEOs are speaking.  While these are of course very interesting, I often think it may be the ‘under the radar’ executives that may say the most.  Sometimes it are these executives who offer the most commentary about the emerging green shoots of an new revenue streams.    I thought that this week as I listened to the Cowen TMT conference when Lumen’s CMO – Shaun Andrews – was interviewed.

While the transcript is most definitely worth a read, the smoking gun comment to me was in reply to the question:

“When do you really start to see real bookings in edge computing that really start to make a difference?”

The answer: “Now.”

Here is the green shoot…

Mr. Andrews then went on to add:  “We’re going faster with edge computing than anything I can remember in history going with”.   While the cynic may say that Lumen (former CenturyLink) never really went “fast” with anything, so bar is low.  Mr. Andrews himself has over 25 years of experience and was with growth companies of the past, including Level3 and WilTel.    So this statement should not be ignored.

Unlike many of these interviews, Mr. Andrews actually put meat on the bone with specific examples as to edge business models for Lumen.  The most interesting one to me was his commentary about the opportunity with T-Mobile.   He offered tangible models as to how IoT and Fixed Wireless access could represent two significant opportunities of growth for the two companies to work together.  How this relationship grows will be something to watch.

I know I sound like a broken record here – but wireless does most definitely need wires.  If we know one thing about 5G infrastructure, it is that fiber is the connective tissue of this emerging ecosystem.  While T-Mobile has a plethora of spectrum (the full wedding cake of it in low, mid and high-band), it does not have the “wires” (aka fiber and transport) to make this spectrum work most effectively.  Lumen does.  And they have more than anyone, maybe second only to AT&T.  They say a picture is worth 1000 words.   Click here to see the reach of this network:   https://www.lumen.com/en-us/resources/network-maps.html  THIS HIGHLIGHTED PART CAN YOU HYPERLINK IT

These blue lines on this image are significant to T-Mobile and it is hard to find them from anyone else T-Mo does not compete with (ZAYO would be an important exception).  In many ways those lines represent the tracks on which the T-Mo spectrum rich train can ride most effectively. While virtualization and Open RAN are the ways of the wireless future, a large part of the spend to enable this is IN the network itself.  Here is where Lumen comes in.

For Lumen, edge has to be more than just a talking point.  When I was an analyst following Lumen, one of the biggest push backs I got on the name was the higher margin legacy  business was declining at a faster rate than the lower margin “growthier” businesses were growing.  Another knock on it was that the company was continuing to cannibalize its own businesses.   The beauty of edge for Lumen is that there is no cannibalization  – it does not come at the cost of any other revenue line.  Edge represents a greenfield opportunity set. And there are not many of those in telecom land as anyone who has followed the space knows.  The moat around the business is very much there – go back to the image with those blue lines if you need a reminder!

AT&T: When you are in a hole, stop digging

I took a break from this column last week as I think I was a bit of deer in headlights as I digested the big AT&T news.  It almost was personal to me as I vividly remember when AT&T’s CFO announced during a conference at my prior firm that its Time Warner deal was being reviewed by the DoJ.  After he exited the stage that day, there were literally 100+ arbitrage investors that surrounded him (think of a rugby scrum…that is what it looked like!).  Then after that day a hard painful approximately seven months followed until the deal finally closed in 2018.  So my shock and awe when I saw the WSJ story hit that AT&T was reversing course was real.

But now a week out, I have what I think AT&T also  does….strategic clarity.  I understand for AT&T investors, employees, and probably several layers of management, that this is a painful time.  But there is an expression:  “When you are in a hole…stop digging.”  John Stankey put down the shovel.

Of course, much can be said and written about how AT&T could not compete with Netflix’s content budget, DTV was a mess, and that their trouble all started when they did not get T-Mobile deal done in 2011…but that is all rear view mirror stuff.  What happened last Monday was significant because AT&T (some would say finally) is going back to its roots and is now focused on  its pipes.  These (broadband and wireless) pipes were getting rusty.  But now they have the capital to put toward  scraping this rust off.    With a sole focus on fiber expansion (30 million homes by 2025) and 5G and smaller dividend shackles, this could get really interesting.

One thing to me that was noteworthy in listening to all the talking heads on this deal was the discussion about Comcast.  There was a lot of “Can Brian Roberts let this happen?” talk-about.  I mention this because I think most are missing a very obvious point.  If you are Roberts, you may not only be sore because you missed a media asset.  But you may have to have a heart-to-heart conversation with your Board that your broadband competition will  be getting a lot more fierce, and this broadband business is the heart of Comcast’s core profitability.   This is also true for Charter.

Altice can be separated from the conversation given its front-footed approach to fiber.  For Comcast specifically,  NBC and amusement parks are nice and all, but the broadband pipe contributes to  the majority of  its free cash flow.   With Monday’s announcement, AT&T said it plans to grow its fiber connected homes to almost 50 percent of their footprint and will be building out more homes / year than it has in the last 10.   Where AT&T has fiber, it succeeds (check their earnings supplemental if you doubt this).   What AT&T did Monday was simplify.  It used to be a company full of spinning plates – 5G, HBO, legacy Turner, Broadband, Enterprise, etc.  Going forward it won’t be anymore and that is a very good thing.  But others may be…..

In my first six weeks at my new job I have learned much from the international team here.   One of these learnings I did not appreciate as a domestic-only focused analyst in my prior life was that the Europe telecom operators who woke up to fiber gained share from cable.    The same trend is happening in Canada (Bell Canada gaining share from Rogers, etc).    The breadcrumbs for the telecom fiber-love were there before AT&T’s big announcement.  Look at what Frontier, Windstream, Consolidated, etc have all been saying and doing.  It was almost hiding in plain sight, but AT&T’s move is shining the light directly on it.   If one steps back and thinks about this, AT&T’s move may be  a much bigger issue for some of the cable players than a good media asset passing them by.

 

The importance of connectivity-rich data centers to 5G

Equinix (EQIX) recently published its third annual Global Tech Trends Survey (GTTS).  This survey gathers views and insights from 2,600 IT enterprise decision makers in 26 countries across EQIX’s three regions (Americas, Asia-Pacific and EMEA).  It never disappoints!  Given its strong connectivity reach, one could argue that more than any company, Equinix has the most ‘tangible touchpoint’ as to how enterprises are viewing the digital infrastructure space and their future needs.

While this report had many take-aways and learnings, the three most interesting data points in my view were as follows:

  1. Virtual Is Way Of Future– More than half (57%) of companies still plan to expand infrastructure but more importantly, almost two-thirds (63%) of them plan to achieve this virtually rather than investing in physical IT infrastructure.    In reading this stat, it  reminds me of what AT&T once said: ‘we are moving from a hardware company to a software one….vendors that support this will be with us…ones that do not will not be along for the ride’.
  2. The Clouds Will Continue to Get ‘Puffier’  Almost 60% of respondents are planning to invest in technology to make their businesses more agile post-COVID.   While this is not surprising – how much they are bear hugging the cloud to increase this agility is.  Specifically, 68% of enterprise respondents said plan to move more functions to the cloud.  So that runway is still very long.   Put another way, if you are a data center or fiber company, the cloud most definitely will continue to be your friend, not foe.
  3. 5G – The New “Frenemy”? –  This was the point most interesting to me.  50% of the respondents agreed that 5G will have the biggest impact in getting them  access to new technologies, but in the same breath, over one-third are nervous they will need to  “rearchitect infrastructure” to do it.   In some ways this is somewhat contradictory  to point # 1 above. Based on their answer above,  there is a realization by enterprises there is a  need to spend.  However, unlike IT infrastructure (which can bend more virtual), it is hard to get around any 5G infrastructure without a lot of physical hardware behind it.  Virtualization in 5G is happening, but you need a whole lot of physical infrastructure to get there.

It is all ol’ chicken and egg discussion with 5G: Build it and it will come, but it won’t come until it is built.   Those enterprises that sit out on this spending run significant risks of being part of the ‘left behind’.  We think most realize it and if you are a company leveraged to this space (towers, small cell, DAS owners, private network players, edge compute, etc) the roaring 20s may be just beginning!

While we know an author is always biased toward their own work, those companies which are at the center of these themes are the connectivity-rich data center entities.  Equinix and Digital Realty top this list.  A perhaps overused line in the wake of COVID has been “companies need to make a digital pivot.”  Of course this is true.  But there are layers underneath this ‘digital pivot’ that should not be ignored.  While the loud sucking sound of the cloud has been appreciated for a while, the impact of 5G on data centers has not.

In word searching the last EQIX Q1’21 earnings conference call, it is interesting to note that while the word ‘cloud’ came up 18 times, the phrase ‘5G’ came up only once.   Dollars to donuts (to quote my 75 year old mother!) that mention goes up big time this time next year.

$40 billion in Capital Expenditures. In 3 months?

Amazon’s  Q1’21 earnings report came out this past week.  While I was never a technology analyst, there was no question this print was VERY good all around.  But the number that REALLY jumped out to this old telecom analyst was in their FCF (Free Cash Flow) Reconciliation slide (slide 16 of their earning’s presenation) which outlined their “Purchase of Property & Equipment, Net of Proceeds from Sales & Incentives.”  In perusing this slide, I most definitely did a double take.  Why?  Because it said in this category, Amazon spent $40B in  Q1’21….yes – $40B in capital expenditures –  in  3 months.  To put this in perspective, this is 2.6x more than the $15.4B it spent in Q1’20.

But more importantly in reading this stat, it jogged my memory to a press release put out by AT&T on 11/8/2017.  The release was saying that AT&T would invest an additional $1B if the Competitive Tax Rate was enacted in the US.  In making its case, AT&T argued that it “Since 2012, AT&T has investment more in the US than any other public company.”  Like all carefully worded press releases, there was the all-important footnote.  The footnote noted that between 2012-2016 AT&T’s total investment in the  US, including acquisition of spectrum (never cheap!) and wireless operations, was $135B.

So going back to the earnings from Amazon this past week, consider this: the $40B Amazon spent in 90 DAYS was 30 percent of all the capital which AT&T spent in four years (or 1460 days).    While I recognize that Amazon is spending on different things than AT&T (mostly in the form of data centers vs. spectrum), one has to take a moment of reflection of how much has actually changed in the past 3.5 years.

I remember sitting on panels and one of my ‘talking points’ was that AT&T spent more capex than any US entity, second only to the US government.  And guess who was right behind them?  You guessed it…Verizon.  Now, fast forward three years…times most definitely are a changin’!

In my new job, I have spent the past month reconnecting with some of my favorite management teams and contacts.  In beginning one of those conversations, one of my smartest contacts saying: “Jen, did you think you would come back to the industry and see Microsoft and Amazon emerging as the largest telecom companies?!”  While they don’t have broadband pipes and spectrum in their tool kits, they certainly have the spending power and deep (deeeeeppppp) pockets to spend to create connectivity either through their own spending or partnerships.

On its recent Q1’21 call, Microsoft did not back away from this view.  Specifically noting: “…whether it’s on the hybrid infrastructure or the multi-cloud, multi-edge world, which I believe is going to be the world 10 years from now, we are very well-positioned. We have led in it, we currently lead in it, and we plan to continue that.

We have written before that the lines between the Communication Infrastructure silos are indeed blurring.  But maybe this ‘blurring’  it is a much bigger theme than just the infrastructure space and may apply to the carriers and tech players themselves.  If so, five years from now history will show that that quote from my very smart contact was quite clairvoyant!

 

 

Goldilocks, The Big Bad Wolf and the impact on wireless margins

On the heels of AT&T and Verizon’s Q1’21 results, it makes sense to take a bigger picture look at their  wireless strategies.  AT&T’s print was applauded by the Street with the stock up over 4% on the day of the report (big move for a company of this size!).  Verizon was met more by a bit of a  “Meh!” response.

For both these players, we are very much at a pivotal moment for their wireless businesses.  Both companies have more than showed their  longer term  commitments toward  this business by spending $53.9B and $28B in the recent C-Band auction (including clearinghouse fees) from Verizon and AT&T respectively.  So why  is this a pivotal moment?  Because a pricing headwind has been blowing directly in their face the past few years and 2021 will lay out the foundational path as to how they try to change the direction of this wind.

To put some meat on the bone of this pricing degradation, in a recent blog piece, the CTIA noted that for US, wireless “sticker” prices have declined 45% since 2010. And to add insult over injury, ARPU has declined 21% in the same period.   To put this in perspective, during this same period food prices are up 63%, housing up 65% and cable/satellite TV services are up 96% (!!!).  So as Fed Chairman Jay Powell goes through his  inflation ‘watch list’, it seems wireless services could safely appear at the very bottom.

While Powell may not have to worry about this trend, AT&T and Verizon sure do.   For a few  reasons, frankly.  First, profitability continues to be a challenge and the fixed cause nature of this industry is being seen on margins.   While AT&T had good news to say on the sub front in Q1’21, AT&T’s mobility business saw EBITDA margins compress by 290 bps YoY.  Verizon’s margins have also hit  troubled waters  with Q1’21 Consumer Business margins down 90 bps YoY.

Second, even with their winnings from the C-Band auction, both AT&T and Verizon  are still behind T-Mobile in terms of mid-band spectrum holdings.  Specifically,  Team Magenta still has 1.3x more mid-band than Verizon and 1.7x more than AT&T.  As a result.  T-Mo can turn on the faucet much faster and offer more to consumers for a lower price.   Simply put,  if midband is the ‘Goldilocks’ of spectrum, T-Mo can be the ‘Big Bad Wolf’ to both AT&T and Verizon given their advantage here.

Last,  if  the carriers  are getting less revenue from the ‘typical’ wireless customer, they need to branch out and diversify their revenue. They know this and are trying to do this is in different ways (VZ with more fixed wireless home and other 5G initiatives; AT&T through fiber and joining the Hollywood party).  While they have gotten the memo and understand the urgency, none of these strategies are layups given that each path faces a growing competitive field and a whole lot of capital!   This is not to say they cannot work, but the time, urgency and focus has to be put in now.  As with all things in this space, it will be incredibly fascinating to watch how it all plays out.

 

If Edge is Becoming More than Just a Buzzword, Digital Realty Needs to Find a More Formal Way be There.

On March 17th, Digital Realty announced it had completed the sale of 11 data centers in Europe to Ascendas REIT.  In US dollars, the price of $680MM representing an EBITDA multiple of ~17x based on most analysts’ estimates. This divestiture was already factored in Digital’s 2021 guidance – so  (putting on my old analyst hat) there should not be a big change to numbers (which optically is always a very good thing for a stock price!).

This ‘capital recycling’ as it is called is NOT a new part of Digital’s playbook.  They have done this successfully in the past (including with the recent Mapletree JV deal).  While some of this capital will go toward de-leveraging, M&A is an integral part of Digital’s DNA (recall – their CFO was a top banker in the space before joining the company).  The big bet is they are able to deploy this capital and realize a higher cap rate than what they were getting from these divested assets (~6%+).   So the key question is where do they go?   While there are geographies which Digital likely wants to increase their presence (greater exposure to India has always been a point of discussion) – a recent blog post by them may offer some clues.

Specifically, in its Blog post in late January (LINK HERE: https://www.digitalrealty.com/blog/how-data-gravity-digital-transformation-and-hybrid-it-will-define-2021) Digital spoke much about the Edge and the need for “re-evaluation of architectures.”  Driving these trends are the shift to “data localization” (think GDPR) and need for “cyber-physical security.”    The ‘money quote’ which jumped out to us in the write up was: “Connected devices at the edge are predicted to generate more than 79 zettabytes of data by 2025—5x higher than the amount generated last year.”

We agree with this view and its impact on the industry.  One has to wonder if Digital is thinking more formally as to how it will develop this edge play.  With almost a third of Digital’s revenue coming from cloud players, Digital will need to have some sort of ‘pitch’ as to why it can further help its customers with this path.  Microsoft, a top customer for Digital, just recently introduced “Azure Precept” at its Ignite event. Thus, to say the Edge is top of mind to many of these CSPs is indeed an understatement.

If Edge is becoming more than just a buzzword, Digital needs to find a more formal way be there.  The task is not too large for them.  Digital has been a company in enormous transition in the past five years. Remember, it  used to be known as  ”just a space and power” company a few  years ago.  But it pivoted to connectivity and now has 164,000 cross connects.   While much of this was due to the InterXion acquisition, it went  to where the proverbial hockey puck continues to be going.

Like other capital recycling moves Digital has made in the past, this one last week in Europe was a concerted effort to rationalize their more mature assets and use the proceeds from that to make forward-looking chess moves in this space!  My bet is that next chapter will somehow involve the all-important  Edge.  To be a fly on the wall of Digital’s business development teams’  Zoom calls (or should I say Microsoft Teams calls!?) would be very interesting right now that is for sure……

 

 

The SPAC is Back! 

That is the headline that has tapped into MAJOR talk time on CNBC of late!  It seems like every day there is a CEO of a new SPAC on there trying to talk up his / her new vehicle and why it should be a focus for investors.   But according to Data Center Frontier, the SPAC-attack is getting closer to our universe.  Specifically, there are two new SPACs where seasoned and tenured data center executives joined the C-Suite.

Specifically, members of the former management team at CyrusOne will be joining the team at InterPrivate Acquisition Partners.  This SPAC is expected to focus on digital infrastructure.  Former CONE CEO (Gary Wojtaszek) has signed on as an advisor.  Additionally, Michael Tobin (from TelecityGroup fame) is reportedly working with an Amsterdam SPAC called Crystal Peak also  focused on the data center space.  Recall, under Tobin, TeleCity did numerous  acquisitions  (originally build from the ground up of three companies – TeleCity Limited, Redbus Interhouse Limited and Globix Holdings (UK) Limited) and became one of the largest independent data center operators in Europe before being purchased by Equinix in 2016.

While we agree that the non-stop SPAC train could be indicative of some of the “irrational exuberance” that Mr. Greenspan   so famously  spoke about in 1996, both Wojtaszek and Tobin have a reputation for strong  strategic vision and they predicted forward looking trends very well.  Remember CONE  ‘bear hugged’ the hyperscalers well ahead of many of their data center competitors.  And TelecityGroup was one of the early pioneers in the now extremely active European data center market (which we still estimate is two-three years behind the US and likely will be the region with the most data center growth over the coming year).   As a result, while the SPAC party is indeed a crowded one, the brain power coming with these two should not be overlooked.

Listening to the great (and very wise) Colby Synesael  during his presentation at the Virtual Metro Connect show Monday (2/22) morning, it seems like there is much to wood to chop  in the data center M&A space to keep these SPACs busy.  For data centers specifically, even though the space has already seen a wave of intense M&A, there are still many targets out there.  These include (but are not limited to): Data Foundry, Telefonica LatAm Data Centers, Aptum Canada, TIM Data Centers, KIO Networks, INAP, Global Switch, Digiplex Nordic Data Centers.    To have the knowledge and operating experiences of these  teams may give a SPAC a leg up vs. some of the PE, Sovereign Wealth, Pension and Infra Funds who have a lot (a LOT) of capital but not a lot of experience navigating this complex and ever-changing space.