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DFT Merger Is Accretive Deal, Says Analyst

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According to a recent report from Canaccord Genuity Inc., the recent merger between Digital Realty and Dupont-Fabros “is constructive.”

As the REIT Wire reported on Friday, Digital Realty and DuPont Fabros have entered into a definitive agreement under which DuPont Fabros will merge with Digital Realty in an all-stock transaction. The consummation of the transaction is subject to customary closing conditions, including approval by the shareholders of Digital Realty and DuPont Fabros.

In looking at the deal, Canaccord analyst Paul Morgan says that the firm’s initial read on the deal is that it represents “a strategic reversal after DLR’s recent colo-centric initiatives (TelX, the Equinix portfolio, and Megaport). Turn-Key Flex deals have continued to represent the majority of bookings (~60% on LTM basis) while DFT’s portfolio offers strong geographic overlap, a greater cloud-customer weighting (42% vs. DLR’s 23%), and growth capacity from DFT’s land and in-process developments.”

He continues to note that “Despite a 16% stock premium on the deal, management expects near-term cost synergies (G&A/Int. exp.) to drive 4% year-one AFFO/sh accretion, while removing a prime competitor for wholesale deals in several key markets.”

In the Canaccord analysis, they note that Digital’s move is consistent with complementary, full-stack strategy. “We are surprised to hear concerns today that the deal represents a strategic reversal given DLR’s recent focus on developing a colo/interconnection business with its TelX merger and Equinix/Telecity acquisition. Management has been clear that these investments are part of a strategy to develop a full-stack (“scale, colocation, and connectivity”) suite of offerings, rather than any turn away from DLR’s core competency in the wholesale market, which has continued to represent the majority of DLR’s asset base and quarterly bookings.”

The company also points out that the development pipeline offers valuable capacity in top US markets. “DFT’s current development pipeline includes ~$400M of near-term projects with strong pre-leasing, led by SC1 in Santa Clara ($165M, 16MW 100% pre-leased), and ACC9 in Ashburn ($260M, 29MW, 60% pre-leased) and CH3 in Chicago ($142M, 14MW, 100% pre-leased). Additional phases for leasing growth include incremental capacity in Chicago, Ashburn, Toronto, and Oregon.”

When breaking down the merger accretion, the firm says that “Given the high portfolio overlap and DFT’s pure wholesale focus, G&A synergies are expected to be high ($18M), driving a 1% first-year AFFO/sh accretion by management’s estimate. Additionally, DLR plans to capitalize on its balance sheet scale by refinancing DFT’s $1.6B in debt, supporting expectations of another 2% AFFO accretion, with the final 1% of anticipated accretion stemming from the DLR/DFT multiple differential. The stock transaction is expected to close in 2H17 following a shareholder vote.”

Lastly, the company says that revenue synergies and competitive benefits offer another level of deal upside. “Cloud customers represent 42% of DFT revenues – including Microsoft’s nine buildings (25% of DFT’s ABR) and Rackspace (three buildings, 9% of ABR) – taking DLR’s cloud customer share to 26% of revenues. While wholesale competition is robust in top markets, there is no question that the merger eliminated one key competitor, while also providing cross- selling opportunities to new customers for DLR’s colo/interconnection businesses and via global expansion to the company’s European and Asian platforms.”