December 2022 Issue
The idea that ‘data is the new oil’ is not a new concept – data and digital infrastructure have become central to society and the global economy.
The coronavirus (COVID-19) pandemic placed data and digital infrastructure at the heart of company operations. Sudden lockdowns which forced an overnight switch to remote working demonstrated, and certainly heightened, our reliance on digital technology, underscoring the need for supporting infrastructure. The crisis further accelerated business and consumer demand for connectivity, including distributed computing networks.
Today, companies generate and store vast quantities of data and, as a result, data centres have become key acquisition targets for trade buyers and private equity (PE) firms alike.
Dealmaking in the digital infrastructure market has been strong in recent years, with a sharp rise in the number of deals. Data centre M&A shot to new heights in 2021. A number of notable deals were completed, including the acquisition of CyrusOne by KKR and Global Infrastructure Partners for $15bn, American Tower’s purchase of Coresite for $10.1bn, and Blackstone’s acquisition of QTS for $10bn.
Despite economic and geopolitical headwinds, this global boom has continued so far in 2022. It is shaping up to be another record year for data centre M&A activity, with 87 deals worth some $24bn closed during the first six months, and an additional $18bn in pending deals set to close, according to Synergy Research. Valuations have remained high, in part due to the substantial long-term projected growth of the space, alongside the enormous amount of capital available for investment in the sector.
Deal drivers
Underlying drivers of this activity include content distribution (streaming in particular), social media and e-commerce, and the increasing adoption of cloud services. These flourished during COVID-19, and continue to do so. The pandemic’s impact on the digital infrastructure sector was significant, fuelling other developments such as 5G, the internet of things (IoT) and big data analytics, and boosting infrastructure assets, including data centres.
“Demand for digital infrastructure, including data centres, will continue to grow as data collection and analysis proliferates across sectors.”
Demand for cloud infrastructure services continues to go from strength to strength. Global market data from Canalys reveals a 33 percent year-on-year rise in spending to $62.3bn during the second quarter of 2022, with Amazon Web Services (AWS), Microsoft Azure and Google Cloud collectively accounting for 63 percent of the total. AWS accounted for 31 percent of the total spend on cloud infrastructure services during the second quarter, while Microsoft accounted for 24 percent and Google 8 percent. Overall, cloud spending was up $6bn compared with the first quarter of 2022 and up $15bn on the same quarter last year.
Dealmaking can provide companies with an effective way to enter or expand into an existing market, reducing time-to-market and allowing operators to quickly scale to meet growing demand. However, it is not just incumbent players that are completing deals; the PE industry has also taken a keen interest in the digital infrastructure space. According to Synergy, between 2019 and 2021, as the overall level of M&A activity ballooned, PE’s share of total deal value in data centre M&A deals increased to 65 percent, while in the first half of 2022 its share has jumped to over 90 percent. In the 2015-18 period, PE buyers accounted for 42 percent of deal value.
“There is an ever-increasing demand for data centre capacity, driven by rapidly growing cloud markets, aggressive expansion of hyperscale operator networks and continued growth of data-rich digital services,” said John Dinsdale, a chief analyst at Synergy Research Group. “The trouble is that building and operating large fleets of data centres is highly capital intensive.
“Even the biggest data centre operators have had to seek external funding to allow them to meet growth targets while protecting their balance sheets. As the level of resulting M&A activity has shot through the roof, virtually all of the incremental investment has come from private equity,” he added.
Regulatory impediments
Though the outlook for M&A activity remains positive, there are a number of key issues which acquirers should not ignore. Legal and regulatory developments will continue to evolve, particularly in light of growing concerns around environmental, social and governance (ESG) requirements, such as emission standards. The European Union (EU) already has its own Code of Conduct for Energy Efficiency in Data Centres, one of several voluntary initiatives, with the main incentive for participants the chance to win an award for reducing their energy consumption. Further legislation aimed at reducing carbon emissions is likely in the future.
Regulations relating to data privacy and are also being tightened, with potential implications for data centres, including liability risks. Data centres must be cognisant of measures such as ISO/IEC 27001: 2013, SOC 2 Type II, the EU’s General Data Protection Regulation (GDPR) and PCI DDS 3.2. Failure to comply with relevant standards and regulations can have disastrous consequences, especially in light of rising fines.
Expansion
Going forward, demand for digital infrastructure, including data centres, will continue to grow as data collection and analysis proliferates across sectors. Though there are possible bumps in the road, the appetite to expand data centres should remain strong. As such, incumbent data centre operators will continue to look for opportunities in new and existing markets, while competing operators seek to enter the sector. Buoyed by an ongoing wave of consolidation, M&A in this space looks set to persist.
© Financier Worldwide
BY
Richard Summerfield