Telecity's deal with Interxion is worth a look

The last time I wrote directly on Financial Orbit about the data centre operator Telecity was thirteen months ago (link here) although since then I have written indirectly on the stock a number of times (see for example here) most recently when news of a potential link-up with its American listed peer Interxion was mooted a month or so ago. Today's more definitive agreement adds to my confidence with the stock.  Here are some conference call notes I put together: 

Continuing management certainly optimistic:

‘company in a unique position’

‘transformational opportunity to drive growth…biggest European data centre footprint’

Deal terms unchanged from a month or so ago.  Interesting to see at the current share prices Interxion shareholders will receive Telecity shares worth the equivalent of US$32.6 (or c. 8.7% above the current Interxion share price).  

Combination makes good sense on paper…

…and in a geographical map (‘overlap in the larger markets’):

‘Flash’ combination (pre synergies).  For context if the split is 55% Telecity, 45% Interxion then the value of ‘the combined group’ is c. £3.4bn.  Statically x14s EV/ebitda but this should come down relatively quickly.  Assuming synergies as below plus some growth into the x12s by the end of FY16e is definitely possible. 

Synergy phasing well worth noting, essentially a third in the first full year, all by 2018.  Note the third box where areas such as debt and tax optimisation will be considered. 

‘worked together over the last four weeks to further refine these synergies’

‘clear commitment to returning cash to shareholders’

The buyback if fully imposed should, as per the conference call, take 3-4 years which at c. 23% of implied market cap suggests a buyback equivalent of 5.5-7% of share capital per year.  Add on some dividend (call it c. 2% yield) and the return of cash to shareholders could be quite attractive. 

Quick reminder on the proposed management structure going forward -

Q&A –

‘Global footprints start with regional excellence…certainly not the end of our ambitions’

‘very comfortable’ with regulatory requirements

‘each of us have developed skills most appropriate to our customer base’

Noted Telecity 100% funded by bank loans whilst Interxion is more focused on corporate debt.  Still more work here to optimally combine these.  ‘You should see more updates in the future’.  Didn’t want to comment beyond ‘clear upside’ on tax rate question

Preliminary discussions started a year ago. 

Synergies – ‘all we have addressed is the short-term’

Capex synergies – ‘pleasantly surprised’ by how much they could do after looking at the two companies 

‘Long-term what we want is a piece of those orders that come from the United States and that we do not get…and it is large’

Concluding thoughts -

I like this deal and think it makes a lot of sense.  The forward multiples are not super cheap but the theme is strong based on growing data requirements and clear barriers to entry re getting involved in the space.  You need to take some element of a leap of faith re the valuation but if you believe they will hit the synergies the valuation will move from the x12s EV/ebitda FY16e to the x10s FY17e and single digit FY18e.  With explicit commitment to buybacks/enhanced dividends (as per the numbers in the text at a high single digit FCF yield) I think this is a buy and that the near 1000p level achieved just post the initial deal announcement in February will ultimately prove to be a new support.