Up Close with DH Capital: Peter Hopper says Industry Slowing but Hyperscale Strong as Ever
by Josh Anderson
DALLAS, TX — Since 2001, DH Capital has completed over 154 transactions, totaling more than $21.3 billion. The majority of the transactions have been M&A principally representing sellers, but DH capital has also been involved in capital placement. This year has not only been a busy year for the sector, but DH capital has been involved in about $7.5 billion worth of transactions year to date (January-August). At our Texas Data Center Summit earlier this month, we heard from Peter Hopper, CEO & Partner, DH Capital, LLC via Skype about how the key trends in the industry have driven and/or influenced DH Capital’s activity. This is the first in a multi-part transcription of Hopper’s remarks, which were moderated by Miles Loo of Newmark Knight Frank’s Valuation & Advisory.
“I guess that in terms of the key deals that DH has been involved with, going back to the beginning of the year, we were involved in advising Vantage Data Centers on their sale to Digital Bridge,” he began. “We advised Cologix on their sale to Stonepeak. We advised Sentinal on their sale to CyrusOne. More recently, we advised Peak10 on their acquisition of ViaWest and moving a little bit beyond the pure data center side of things, we advised DataByte on the transaction they’ve announced but haven’t closed yet with RackSpace. As opposed to all of those deals, which are all invariably large deals, we’ve been involved in a number of smaller businesses as well.”
And in terms of what is driving all of this activity? “I think that on the wholesale side of things, the big trend is obviously hyperscale cloud demand, Hopper replied. “And I think that if you go back to the 2016, even late 2015, and look at some of the quarterly leasing numbers, you really have a sort of dynamic going on where the hyperscale users are really almost behind the curve in terms of passing. That caused them to really need to take up tremendous amounts of space very quickly, in a lot of different markets. And that caused them to sort of deal with anyone who could help them meet their needs in a number of markets around the country and then around the world.”
Hopper then said that he thinks that as things have slowed down a little bit — and hyperscale demand is still extremely strong — increasingly the larger hyperscale firms are trying to rationalize their data center relationships. “And I think they’re sort of looking to work with a set number of players who can meet their needs in markets around the country and around the world,” he said. “And so I think it’s putting a real premium on scale. It’s putting a real premium on being able to operate scale to not only drive the cost of capital down, but to be able to meet their needs in a number of markets instead of just a single market for example, and it puts a real premium on your ability to really drive load costs down.”
“So a lot of those actors are what’s driving the consolidation as well,” Hopper continued. “And certainly, as we saw last week, with Switch’s IPO, the public market is worrying the data center operators that are public with premium evaluations. And that’s giving them the ability to be very aggressive in terms of M&A, based upon where they’re trading, and offer private platforms like a Cologix, like a Sentinal certainly, and in any case with DigitalBridge by Vantage – these were done at chart-topping multiples. And more recently, the Dupont Fabros deal, obviously, at a premium evaluations. So evaluations are very good. Scale and geographic scale, the cost of capital advantages, build-cost advantages, all of these things are really coming up to drive a lot of M&A activity.”