Data-center REIT Digital Realty Trust Inc. DLR has announced a deal to acquire Ascenty, a data-center provider in Brazil, in a transaction valued at around $1.8 billion. The transaction will be carried out by the company's Brazilian subsidiary - Stellar Participações Ltda. - which will acquire Ascenty from private equity firm Great Hill Partners. The deal is expected to close in fourth-quarter 2018.
Digital Realty has also entered into an "independent bilateral equity commitment letter" with a Brookfield Asset Management affiliate, per which Brookfield has committed to fund half of the initial equity investment. This is estimated to be approximately $613 million. In exchange, Brookfield will own 49% of the joint-venture entity which is likely to own Ascenty.
Although Ascenty's buyout will likely be initially dilutive to financial metrics, the company expects it to be accretive over the intermediate term. Further, the move is projected to be accretive to Digital Realty's long-term growth rate.
Notably, Ascenty has an in-service portfolio of eight premier data centers in the key Brazilian metro areas of São Paulo, Campinas, Rio de Janeiro and Fortaleza. Its portfolio consists of 106.2 megawatts of total planned capacity. Of this, 39.2 megawatts of capacity is currently in-service, 34.0 megawatts of capacity under construction, while 33.0 megawatts of potential additional capacity. Moreover, its options or leases on five separate sites marks up to an estimated incremental 66.5 megawatts of potential future growth capacity.
Majority of Ascenty's facilities meet internationally recognized facility and service standards, and this helps the company serve a blue-chip customer base, including leading global hyperscale cloud providers. In fact, more than 90% of Ascenty's contractual cash rent comes from customers whose parent entities have investment-grade or equivalent credit ratings.
With leases representing 75% of Ascenty's contractual cash rent being denominated in U.S. dollars, there is less foreign currency exposure. Also, its proprietary ~ 4,500-kilometer fiber optic network gives competitive advantage.
Further, with a favorable macroeconomic environment and demographic factors, including working age population growth and fast digitization, the Latin American region is likely to experience healthy data-center growth. In fact, Brazil is likely to emerge as Latin America's technological hub. Therefore, the buyout of Ascenty will offer Digital Realty the scope to capitalize on this favorable environment. Also, combining of Ascenty business with Digital Realty's global operating platform is likely to result in substantial cost efficiencies.
Separately, Digital Realty priced an underwritten public offering of 8.5 million shares of its common stock, being offered in connection with the forward sales agreements, at a price of $113.00 per share.
Notably, data-center REITs might continue experiencing a boom market with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. Additionally, the projected growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five-eight years.
These factors are anticipated to be significantly conducive to growth of data-center REITs, such as Digital Realty, Equinix, Inc. EQIX , CyrusOne Inc. CONE , CoreSite Realty Corp. COR and others.
Digital Realty is poised to benefit from this solid demand for data centers through accretive acquisitions and development efforts. Last year, the company completed the merger with DuPont Fabros, and has also enhanced its presence in Europe, Australia and Asia in recent years through the development of high-quality facilities. Nevertheless, aggressive pricing pressure is likely to continue in the near future. Also, it has a substantial debt burden and hence, rate hike remains a key concern.
Digital Realty currently has a Zacks Rank #3 (Hold). Shares of the company have outperformed the industry it belongs to, in the past three months. The stock has gained 6.1%, while the industry has declined 1.1%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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