Digital Realty to acquire carrier-neutral firm Teraco

Digital Realty, a global provider of cloud and carrier-neutral data centre, colocation and interconnection solutions, has announced that it has entered into a definitive agreement to acquire a majority stake in Teraco, Africa's leading carrier-neutral colocation provider, from a consortium of investors, including Berkshire Partners and Permira, in a transaction valuing Teraco at approximately US$3.5bn.  

The transaction establishes Digital Realty as the Leading Colocation and Interconnection provider on the High-Growth African Continent. "This highly strategic transaction immediately cements Digital Realty as the leading colocation and interconnection provider in Africa, a region experiencing a rapid digital transformation," said Digital Realty Chief Executive Officer A. William Stein.  

"Teraco is the industry leader in South Africa and the continent's connectivity hub. This investment will enhance our ability to serve customers on a global basis by adding a significant regional scale with a premier, network-dense portfolio in South Africa's most strategically important metros.  Teraco will also advance our strategy of increasing exposure to highly connected, network- and carrier-dense facilities to enhance our global coverage and connectivity capabilities,” Stein added.

What will the acquisition of Teraco achieve?

• Leading colocation and interconnection platform: Teraco is the largest and most densely interconnected data centre platform in Africa, with seven state-of-the-art facilities strategically located in the key South African metros of Johannesburg, Cape Town and Durban. Teraco serves over 600 customers, including more than 275 connectivity providers, over 25 cloud and content platforms and approximately 300 enterprises. Teraco facilitates approximately 22,000 interconnections between customers and its Isando campus in Johannesburg is one of the most densely interconnected sites in the world, with over 13,000 cross-connects. Teraco also hosts seven on-ramps to leading global cloud service providers in Johannesburg and Cape Town and currently provides direct access to seven subsea cables in Durban on the east coast and Cape Town on the southwest coast.

• Home to subsea cables circling Africa: In addition to direct access to seven existing subsea cable systems, several consortiums of leading cloud and content platforms are currently building three additional subsea cables which are expected to land over the next three years. The significant investment in these proprietary networks underscores the tremendous expected future growth of digital infrastructure in Africa, and the leadership transition from telco-led consortia to content-controlled partnerships is expected to transform internet connectivity across the continent. These new and existing cable systems encircle Africa, offering low-latency access from the east and west coasts of Africa to Europe and Asia.

• Solidifies global platform first-mover advantage : The combination of Teraco's leading position in South Africa with Digital Realty's leading connectivity hubs in Nigeria on the west and Kenya on the east coast – along with Digital Realty's strategic Mediterranean interconnection hubs in Marseille and Athens – is expected to significantly strengthen Digital Realty's leading pan-African position, enhancing the ability to serve local as well as multinational enterprises and service providers.

• Underserved region expected to see significant growth: The total addressable data centre market in Africa is expected to expand significantly over the next several years. The total population of Africa is nearly 1.4 billion, or more than 15% of the world's total population, with a median age of just 20 years. Digital transformation is accelerating, and it is happening in South Africa first and radiating across the African continent. South Africa's economy is the third-largest in Africa, and South Africa is home to more than half of the region's top 500 companies. South Africa also serves as either the worldwide or regional headquarters for many companies doing business elsewhere in Africa. South Africa is the largest data centre market on the continent, although it is estimated that only a fraction of potential demand is being effectively addressed, given the relative scarcity of institutional quality data centre capacity.

• Experienced local management team: The Teraco management team will remain in place and will maintain day-to-day responsibility for operations in South Africa. The Teraco management team is led by Chief Executive Officer Jan Hnizdo, a longtime team member who has helped drive Teraco's significant growth over the last decade. Hnizdo is supported by an experienced and highly qualified local management team with over 100 years of combined experience. In addition, Teraco's existing investors, including several leading global digital infrastructure investors with extensive experience investing in Africa, are rolling forward a significant portion of their equity interests, demonstrating their conviction in Teraco's future growth prospects under the Digital Realty umbrella. The continuing involvement of management and the existing investors is consistent with Digital Realty's new market entry strategy of partnering with strong local management teams and experienced regional capital partners.

• Significant embedded growth potential: Teraco has historically generated healthy double-digit growth in key financial metrics, including revenue, EBITDA and participants on its platform. The Teraco platform contains 187 megawatts of total planned capacity, including seven in-service facilities totaling 75 megawatts and one development project totaling 19 megawatts currently under construction. Teraco owns the freehold to six of its seven data centres, representing over 85% of total revenues and including its densely interconnected campus in Johannesburg. In addition, Teraco owns land adjacent to its Johannesburg and Cape Town campuses that will support the development of up to 93 megawatts of additional capacity, representing significant embedded growth potential and providing considerable runway to support customer growth.

Teraco Chief Executive Officer Jan Hnizdo said: "We are excited to enter our next chapter by joining forces with Digital Realty to create a truly global, scaled platform serving our customers in Africa and beyond. Our combined platform will be uniquely positioned to serve the full customer spectrum with the ability to support their growth around the world.  We look forward to working with the Digital Realty team to extend our state-of-the-art data centre and connectivity solutions to capitalise on the favorable industry trends and tremendous market opportunity." 

The transaction values Teraco at approximately US$3.5bn, representing a cap rate of approximately 3.5% on projected 2022 cash net operating income of approximately US$121mn. According to Digital Realty, the transaction is expected to close in the first half of 2022.