Digital Realty Confirms Rumors

William Stein, Digital Realty

By Gail Kalinoski, Contributing Editor

Digital Realty Trust, Inc., the largest data center REIT, is getting bigger with the planned acquisition of Telx, a privately owned national provider of collocation, interconnection and cloud enablement solutions, for $1.9 billion.

The San Francisco-based REIT, which is a leading global provider of data center and colocation solutions, and Telx, owned by private equity firms ABRY Partners and Berkshire Partners, announced the deal Tuesday after rumors have swirled about a possible deal for at least the past month. Reuters had reported in early June that Digital Realty was one of several U.S. and international bidders for the New York-based Telx.

The deal is expected to close later in the year. Digital Realty also announced that it had received a commitment from lenders for a $1.85 billion unsecured term loan bridge facility if needed to fund part of the acquisition.

“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 and presence in the attractive colocation and interconnection space,” William Stein, Digital Realty’s CEO, said in a news release. “Telx’s well-established colocation and interconnection businesses provide access to two rapidly-growing segments with long-standing customer relationships in top-tier metropolitan areas such as New York and Silicon Valley.”

The combination is expected to double Digital Realty’s footprint in the rapidly-growing colocation business, as well as provide its customers with access to a leading interconnection platform. Industry experts have said the deal is a sign of ongoing consolidation in the data center sector as more services are needed to remotely store information from mobile phones, tablets and computers. It would also be the biggest data center sector deal since Equinix Inc. of Redwood City, Calif., agreed in May to acquire European-based Telecity Group Plc for $3.7 billion, creating a trans-Atlantic data center provider.

As of March 31, Telx managed 1.3 million square feet of data center space in 20 facilities. Of those, Telx owned two, leased 11 from Digital Realty, partially sub-leased another from Digital Realty and a third party and leased six more from third parties. Once the deal goes through, Digital Realty will have 137 operated properties in 30 markets across 10 countries and four continents, according to Fitch Ratings, which affirmed the REIT’s ‘BBB’ Issuer Default Rating (IDR) and maintained a stable rating outlook.

“The fact that more than half of Telx’s 20 facilities are run out of Digital Realty properties further highlights the strategic fit as well as the potential incremental revenue opportunities we expect to be able to pursue as one company on a global basis,” Stein said in the release.

Chris Downie, Telx CEO, said in a prepared statement that they were excited to “become part of a much larger global data center services platform.”

Downie said Telx’s colocation and interconnection capabilities combined with Digital Realty’s expansive wholesale platform would provide “greater flexibility and optionality for our customers.” He added in the joint release that the deal would create “a global solutions provider covering wholesale customer applications and smaller performance-oriented deployments in select high-growth urban submarkets across the U.S.”

Fitch said in its press release that the transaction had several benefits, “including increased tenant and revenue diversity and complementary business lines.”

BofA Merrill Lynch and Morgan Stanley are serving as Digital Realty’s financial advisors and Latham & Watkins L.L.P. are servicing as its legal counsel. Barclays and DH Capital are the financial advisors and Kirkland & Ellis L.L.P is the legal counsel to ABRY Partners, Berkshire Partners and Telx.