Insights

Another Data Center Stock Is Hitting the Road

The data center sector has undergone a dramatic upheaval over the past year. Three real estate investment trusts (REITs) focused on data centers have gotten acquired over the past few months. Now, Switch (NYSE: SWCH), a data center company that was in the process of becoming a REIT, has changed directions and is exiting the public markets.
Here’s a look at the latest deal and what it means for the data center sector.
Image source: Getty Images.

Taking the road well traveled
After some prodding by activist investor Elliott Investment Management, Switch decided to start the process of converting into a REIT late last year. However, three data center REITs have agreed to acquisitions over the past several months. Private-equity giant Blackstone acquired QTS Realty Trust for $10 billion, infrastructure REIT American Tower bought CoreSite Realty for $10.1 billion, and funds managed by KKR and Global Infrastructure Partners took CyrusOne private in a $15 billion deal. 
This acquisition wave led Switch to launch a strategic review of its options earlier this year, including a potential sale. It reportedly received takeover interest from Brookfield Asset Management and DigitalBridge Group (NYSE: DBRG). It eventually agreed to a buyout deal with DigitalBridge and IFM Investors.
The partners will pay $34.25 per share for Switch, valuing the data center operator at $11 billion, including the assumption of debt. That implies a roughly 11% premium to Switch’s closing price the day before the announcement when rumors started to swirl that it was near a deal with DigitalBridge. Meanwhile, it’s 66% higher than the share price last August when Elliott Investment Management pressed it to consider switching to a REIT. 
What’s the draw of data centers?
Infrastructure investors have been gobbling up data center platforms because of the rapidly growing demand for space to store information. Streaming, cloud computing, the internet of things, 5G, artificial intelligence/machine learning, and other catalysts are creating an enormous amount of data, which companies need to store in data centers. That’s providing opportunities for data center platforms to expand.
For example, Switch expects to construct 11 million additional square feet of data center capacity through 2030. That should enable the company to grow its earnings at a double-digit annual rate. This growth profile is very attractive to infrastructure investors, which is leading them to make moves to secure a toehold in this sector.
Dwindling options for public market investors
With Switch hitting the road to the private market, public market investors have seen their available options continue to dwindle. They could shrink further. Data center operator Cyxtera Technologies (NASDAQ: CYXT), which went public last year in a special purpose acquisition company (SPAC) deal, is reportedly evaluating its strategic options, including a sale. Given all the private capital pouring into the sector, it shouldn’t have trouble finding a buyer.
That would leave investors with two remaining options in data center REITs Equinix (NASDAQ: EQIX) and Digital Realty (NYSE: DLR). They’re behemoths in the REIT sector, with market caps of around $60 billion and $40 billion, respectively. Given their large sizes, they’re not likely to be acquisition targets.
Instead, both have been on the other side — as consolidators in the sector. Equinix recently acquired four data centers in Chile for $735 million and MainOne for $320 million, expanding its operations into Africa. Meanwhile, Digital Realty acquired a majority stake in Teraco, valuing the African data center operator at $3.5 billion.
These deals enhanced their already strong growth prospects. Both data center REITs have several expansion projects underway around the world that should drive strong growth rates in the coming years.
Heading for the exit
Insatiable investor appetite for data infrastructure platforms is driving a wave of acquisitions in the space. Switch is cashing in on this demand by agreeing to a buyout deal at a healthy premium instead of staying on the road to become a REIT. While that leaves public market investors with dwindling options, they still have two attractive ones in Equinix and Digital Realty, which have lots of growth ahead.
Matthew DiLallo has positions in American Tower, Brookfield Asset Management, Digital Realty Trust, Equinix, and Switch. The Motley Fool has positions in and recommends American Tower, Brookfield Asset Management, Cyxtera Technologies, Inc., Digital Realty Trust, Equinix, KKR, Switch, and The Blackstone Group Inc. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. The Motley Fool has a disclosure policy. –

The data center sector has undergone a dramatic upheaval over the past year. Three real estate investment trusts (REITs) focused on data centers have gotten acquired over the past few months. Now, Switch (NYSE: SWCH), a data center company that was in the process of becoming a REIT, has changed directions and is exiting the public markets.

Here’s a look at the latest deal and what it means for the data center sector.

Image source: Getty Images.

Taking the road well traveled

After some prodding by activist investor Elliott Investment Management, Switch decided to start the process of converting into a REIT late last year. However, three data center REITs have agreed to acquisitions over the past several months. Private-equity giant Blackstone acquired QTS Realty Trust for $10 billion, infrastructure REIT American Tower bought CoreSite Realty for $10.1 billion, and funds managed by KKR and Global Infrastructure Partners took CyrusOne private in a $15 billion deal. 

This acquisition wave led Switch to launch a strategic review of its options earlier this year, including a potential sale. It reportedly received takeover interest from Brookfield Asset Management and DigitalBridge Group (NYSE: DBRG). It eventually agreed to a buyout deal with DigitalBridge and IFM Investors.

The partners will pay $34.25 per share for Switch, valuing the data center operator at $11 billion, including the assumption of debt. That implies a roughly 11% premium to Switch’s closing price the day before the announcement when rumors started to swirl that it was near a deal with DigitalBridge. Meanwhile, it’s 66% higher than the share price last August when Elliott Investment Management pressed it to consider switching to a REIT. 

What’s the draw of data centers?

Infrastructure investors have been gobbling up data center platforms because of the rapidly growing demand for space to store information. Streaming, cloud computing, the internet of things, 5G, artificial intelligence/machine learning, and other catalysts are creating an enormous amount of data, which companies need to store in data centers. That’s providing opportunities for data center platforms to expand.

For example, Switch expects to construct 11 million additional square feet of data center capacity through 2030. That should enable the company to grow its earnings at a double-digit annual rate. This growth profile is very attractive to infrastructure investors, which is leading them to make moves to secure a toehold in this sector.

Dwindling options for public market investors

With Switch hitting the road to the private market, public market investors have seen their available options continue to dwindle. They could shrink further. Data center operator Cyxtera Technologies (NASDAQ: CYXT), which went public last year in a special purpose acquisition company (SPAC) deal, is reportedly evaluating its strategic options, including a sale. Given all the private capital pouring into the sector, it shouldn’t have trouble finding a buyer.

That would leave investors with two remaining options in data center REITs Equinix (NASDAQ: EQIX) and Digital Realty (NYSE: DLR). They’re behemoths in the REIT sector, with market caps of around $60 billion and $40 billion, respectively. Given their large sizes, they’re not likely to be acquisition targets.

Instead, both have been on the other side — as consolidators in the sector. Equinix recently acquired four data centers in Chile for $735 million and MainOne for $320 million, expanding its operations into Africa. Meanwhile, Digital Realty acquired a majority stake in Teraco, valuing the African data center operator at $3.5 billion.

These deals enhanced their already strong growth prospects. Both data center REITs have several expansion projects underway around the world that should drive strong growth rates in the coming years.

Heading for the exit

Insatiable investor appetite for data infrastructure platforms is driving a wave of acquisitions in the space. Switch is cashing in on this demand by agreeing to a buyout deal at a healthy premium instead of staying on the road to become a REIT. While that leaves public market investors with dwindling options, they still have two attractive ones in Equinix and Digital Realty, which have lots of growth ahead.

Matthew DiLallo has positions in American Tower, Brookfield Asset Management, Digital Realty Trust, Equinix, and Switch. The Motley Fool has positions in and recommends American Tower, Brookfield Asset Management, Cyxtera Technologies, Inc., Digital Realty Trust, Equinix, KKR, Switch, and The Blackstone Group Inc. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;


To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.


An active and funded account with a positive trading balance is required to continue to have access to the tools;


Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;


Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US & HK* Trades. Click Here!