What Do Valuation Trends Portend for M&A?
by Josh Anderson
LEESBURG, VA – CapRE’s Sixth Annual Washington, D.C. & Mid-Atlantic Data Center Summit, the largest and most influential of the year, kicked off with a rousing morning panel discussion, REIT Analysts’ Outlook: Hyperscale, Traditional and Edge Data Centers Against the Backdrop of Evolving Services Landscape, which featured the input of Sami Badri, Senior Analyst at Credit Suisse, on M&A, after providing some analysis on valuations.
“You provided some great analysis on valuations, Sami, but what does that mean for M&A outlook and consolidation moving forward?” asked Moderator Kanan Joshi, Executive Director and the Head of Telecom Infrastructure for Upper Bay Infrastructure Partners. “We saw, in the last 12-18 months, a lot of private equity funds coming in and making acquisitions. We also saw activity by Digital Realty & Equinix. Wha is your take on that?”
“Well just to segué from what I just said, I think that two dynamics have changed,” replied Badri. “One is that the private data center multiples have actually gone up. That’s the first dynamic. I think that what is really driving that is the funding of equity and the funding of investments for those private data centers. sovereign wealth funds, private equity funds, pension funds are all getting involved. These are very ultra long-term holders, right? Ten, fifteen, or twenty years. they don’t need to exit sometime soon.”
In other words, Badri asserted, as a function of less supply of potential take-downs coming onto the market, the industry is seeing private multiples go up. “So I would say that that is the first big piece,” he stressed.
“The second big piece is that, I think, M&A generally should be lower as a function of the multiples being lower,” he continued. “Simply because these companies cannot take advantage of the balance sheets of their equity as aggressively as they historically have. Simply because they’re just not getting the same bang for buck out of every dollar spent on M&A, or even from their shares that they had to dilute out to raise capital for any acquisitions.”
“So from what I see today, I think it’s an interesting juncture,” he surmised, making a final point. “You have the private equity pensions and sovereign wealth funds populating the private market, and you have public equity data center operators essentially having a depressed multiple relative to the private data center multiples. So from here, it would be interesting to see major M&A. But I think the more likely scenario is public to public versus private to private. And I would say that the most realistic outcome is organic CapEx development to grow business from the publicly traded data center side.”
For more from this panel, check out earlier CapRE Insider Reports: