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Equinix (EQIX) Expands Further in Europe, To Buy Itconic

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It seems that Equinix Inc. EQIX is firing on all cylinders to expand its data center business across different regions. The company, in a move to expand its European operations, recently announced an agreement to acquire certain businesses — Itconic and its subsidiary CloudMas — from The Carlyle Group. The all-cash deal is valued at €215 million or approximately $259 million and is anticipated to close during fourth-quarter 2017.

Itconic provides data center services, connectivity and cloud infrastructure solutions across Spain and Portugal. The above discussed acquisition will bring in five data centers for Equinix, with two located in Mandrid, and one each in Barcelona, Seville and Lisbon. On the other hand, Cloudmass is a wholly-owned subsidiary of Itconic that focuses on supporting enterprise adoption and use of cloud services.

The deal marks the company’s third European acquisition this year. Notably, earlier this year, Equinix acquired IO UK's data center operating business in Slough, the United Kingdom and ICT-Center AG’s Zurich-based data center operating business in Switzerland.

Following the announcement, shares of Equinix gained 2.7% during yesterday’s trade. Notably, Equinix has outperformed the industry to which it belongs to in the year-to-date period. The stock has gained 32.8% in the said period while the industry lost 3.8%.


Buyout Makes Sense for Equinix

The addition of the aforementioned facilities will be beneficial for Equinix for a number of reasons. The deal will help the company expand its data center business in the two countries, particularly in Spain, which is the world's 14th and Europe’s sixth largest economy.

Furthermore, the acquisition will bring in over 400 customers and 250 trained employees. It will also strengthen Equinix’s business ecosystem as like itself, Itconic also “provides customers with the broadest choice of service providers for IT and multicloud deployments to accelerate business performance.”

Amazon’s AMZN AWS, Microsoft’s MSFT Azure and Alphabet’s GOOGL Google Cloud are some of the IT-services providing companies which are Itconic’s clients.

Additionally, Equinix believes that the buyout will help it support traffic growth between Europe, Latin America and Africa, which is anticipated to be driven by new submarine cable systems. Therefore, the company will be able to expand its interconnection capabilities across these three continents backed by this acquisition.

Acquisitions — Key Growth Strategy

Acquisitions have remained one of the key growth strategies for Equinix. Last year, the company completed the acquisition of Telecity for $3.8 billion, in turn becoming the leading European data center operator. Moreover, so far this year, the company has completed two European acquisitions and is in the middle of the third one.

The company is also expanding its data center business in other regions as well. In May this year, Equinix completed the acquisition of 24 data center sites from Verizon Communications Inc. VZ. This acquisition expanded its interconnection capabilities in the United States and Latin America.

Its other notable acquisitions include Nimbo — a leading professional services company — primarily focused on enabling enterprises to develop and implement hybrid cloud, and Tokyo-based Bit-isle. All these acquisitions have made decent contributions toward total revenue growth.

Bottom Line

Expansion in important markets and consolidation of facilities in existing ones have been an important part of Equinix's core strategy. Further, the company remains positive on the elevated demand for data centers. To meet the growing demand for cloud services, this global interconnection and data center company is expanding its IBX data centers globally and gaining popularity among tech companies looking for data management. Thus, the company expects its total addressable market for retail data centers to increase at a CAGR of 8% from 2013 to 2017 and reach $24.0 billion. Based on this projection, Equinix forecasts revenue growth rate of 10% through 2017.

Therefore, we believe that by acquiring data center assets, Equinix will be in a better position to capitalize on this opportunity. Furthermore, the acquisitions will help company further strengthen its global footprint and bring in additional revenues.

Nonetheless, we are concerned about the company’s growing debt burden, which will adversely affect the operating results as interest expense would flare up. Also, intensifying competition and industry consolidation are other near-term headwinds.

Currently, Equinix carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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