Why is KKR and Global Infrastructure Partners buying CyrusOne (CONE) in a $15 billion deal?

CyrusOne provides mission-critical data center facilities for approximately 1000 customers. Over the last five years revenue has grown annually by 20%, earnings every year by 20%, and funds from operation too have grown by almost 12% annually . They have a strong presence in US markets where they have created a national footprint & they’ve also gone into Europe. They received an investment grade rating on their debt and the long-term outlook is pretty good – largely because one expects the usage of data to grow, the trend towards enterprise outsourcing, increased reliance on technology, as well as newer things are happening such as data hungry artificial intelligence and in the future the arrival of autonomous vehicles. Most enterprises are now outsourcing their  data centers – it is expected that almost 80% of enterprises will have shut down the traditional data centers by 2025. There is a lot of reliance now on technology and e-commerce, on remote work, in collaboration platforms, technologies such as video over Internet are mainstream, growth in mobile traffic and connected devices all of which drive a lot more consumption of data.

They have a high-quality portfolio of primarily owned assets and most of their customers are in the fortune 1000. In Europe they have a presence across most key markets. They’ve exhibited development and operational expertise and have a good track record. While it is true, they have scaled but they’re not huge – still small enough to generate meaningful growth. With investment grade risk and a customer centric focus they are going to be well-positioned for profitable growth in coming years. The portfolio of assets is good : almost 92% of their operating income comes from the assets that they own, 80% of their customers are in Fortune 1000, and the average credit rating of their large customers is almost 80%. Their leases have rent escalation clauses, the weighted remaining lease term is over four years . When it comes to Europe they have an attractive set of assets across key markets with an emphasis on Frankfort and London. Importantly they have a new data center in the portfolio and long standing relationship with the fast growing customers . With a track record of on time delivery, they also have capacity to significant increase their footprint to support  growth in short time. They have capacity and access to land across key markets to support growth. All this is expected to produce attractive equity for they have access to capital which is critical in a capital intensive business to ensure continued growth, especially where there is market volatility. What speaks volumes is that their customers have entrusted them with mission critical assets,  partnered with them they’re going to grow with them.

Concerns

This said, there are certain things one needs to look out for. For example, demand is concentrated with large customers which is a disproportionate part of their portfolio. They therefore need to diversify this portfolio and execute long-term leases. Another issue of concern is prices in this segment have continue to decrease so they do need to build efficiencies to protect returns against pricing decrease. And of course they are development challenges that come from resource scarcity, local regulations and public sentiment – so they will have to be very deeply local to secure line, water, power permits and leverage their global platform for environmental, safety and regulatory, considerations. They will need to secure long-term capacity pipelines in markets that are going to grow, so this injection of capital will help them to continue to invest in global digital gateway markets to support growth. They ought to emphasize their development and operational expertise story, maintain their strong balance sheet, strive for low cost of capital and grow their funds from operations.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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