Chapter VII: The Reconsolidation

On the morning of Monday, November 15, 2021, two press releases crossed the wire within hours of each other.

In the first, KKR and Global Infrastructure Partners agreed to buy CyrusOne, the data-center company Cincinnati Bell had spun off nearly nine years earlier, for about $15 billion including debt. Data Center Frontier called it "the largest M&A deal in the history of the data center sector." In the second, American Tower, one of the big three cell-tower companies, agreed to buy CoreSite, the Denver data-center REIT, for about $10.4 billion including debt.

Five months earlier, Blackstone had agreed to buy QTS for about $10 billion. Six months later, Marc Ganzi's DigitalBridge would agree to buy Switch for about $11 billion. Four data-center companies, about $46 billion of value, in eleven months.The four are QTS (about $10 billion, announced June 7, 2021), CyrusOne (about $15 billion, November 15, 2021), CoreSite (about $10.4 billion, November 15, 2021) and Switch (about $11 billion, May 11, 2022), all including debt. That's about $46 billion over eleven months of announcements. The QTS and CoreSite figures follow the companies' SEC filings; MoffettNathanson's same-day estimates of enterprise value were lower for QTS (about $8.5 billion) and the same for CoreSite, and on its figures the four come to about $45 billion. See notes 13a and 16. Every deal in this chapter is listed with its date, price and source in Table 7.1 at the end of the chapter.

In Bandwidth, I opened the chapter on the fiber industry's Reconsolidation with a line from an analyst in January 2002: "What you have been seeing is the gradual reconsolidation of an industry that is highly capital intensive and that's perhaps best served by a relatively small number of large companies." It took the fiber business more than a decade to prove him right.

The data-center business did it in about seven years.

At the end of Chapter VI, the demand had consolidated. A handful of cloud companies controlled most of the new demand, and each of them could build without a landlord. This chapter is the supply side's answer. Between 2015 and 2022, the two public giants, Digital Realty and Equinix, bought their largest rivals on both sides of the Atlantic. The phone companies that had bought data centers at the top of the last cycle sold them. And private capital, the infrastructure funds, Blackstone, KKR and a former tower developer named Marc Ganzi, bought nearly everything else, including several of the REITs that had gone public in Chapter VI.

The phoenix had grown up. Now the big birds were eating the small ones.

Digital Realty—Bill Stein#

When we last left Telx in Chapter VI, it was a colocation tenant at 111 Eighth Avenue, renting space in a building that Google had just bought. Telx was in Equinix's business, retail colocation: renting cages and racks to networks and enterprises, and charging them to connect to one another. It was the opposite of Digital Realty's business of leasing big, powered buildings to a few big tenants.

On July 14, 2015, Digital Realty agreed to buy Telx from its private-equity owners, ABRY Partners and Berkshire Partners, for $1.886 billion in cash. Telx had twenty data centers. Bill Stein of Digital Realty explained why the fit was so natural: "The fact that more than half of Telx's 20 facilities are run out of Digital Realty properties." Digital Realty was buying its own tenant.Digital Realty backed the purchase with a $1.85 billion unsecured 364-day bridge-loan commitment and expected it to add to 2016 earnings. Digital Realty's 8-K dates the merger agreement July 13, 2015, and the release names Stein as Digital Realty's chief executive. The deal closed on October 9, 2015.

Stein called it "transformative," and he was right. With Telx, Digital Realty was in Equinix's business. The wholesale landlord could now sell a cloud company a building and sell the networks inside it the connections between them.

DuPont Fabros

Two years later, Digital Realty went after the company that had followed it to market.

When we last left DuPont Fabros, it had gone public at $21 a share in October 2007, fallen to $1.93 in the credit crisis, and come back as the cloud companies filled its buildings. Facebook had been one of its early tenants in Ashburn.

The merger proxy tells how it happened. On March 15, 2017, Stein called DuPont Fabros's CEO, Christopher Eldredge, and set up a lunch. Over that lunch in Ashburn, on March 24, Stein offered 0.51 to 0.53 Digital Realty shares for each DuPont Fabros share, worth $52.50 to $55.00, all in stock. Eldredge said no. Stein came back in April, and DuPont Fabros said that wasn't enough either and hired Goldman Sachs. Digital Realty raised its ratio twice in May, to 0.545, and the two sides signed an exclusivity agreement.

Then it nearly fell apart. On May 31, DuPont Fabros's chairman, Lammot J. du Pont, told Stein that more negotiation "would not be productive." On Sunday, June 4, DuPont Fabros "turned off access to the virtual data site" and asked Digital Realty to return or destroy its documents. The next day Digital Realty sent a new draft, and the deal was back on. The last issue was board seats. Both boards approved on June 8.

On June 9, 2017, Digital Realty announced an all-stock merger with DuPont Fabros valued at about $7.6 billion, including $1.6 billion of assumed debt. DuPont Fabros had twelve operating data centers and six more under development. Eldredge said, "We are excited to deliver this compelling transaction to our shareholders." Stein called it "strategic and complementary."The exchange ratio was fixed at 0.545 Digital Realty shares per DuPont Fabros share. The release gave no implied per-share price or premium. The termination fee was $150 million payable by DuPont Fabros or $300 million payable by Digital Realty in certain circumstances, and the deal had no financing condition. The merger closed on September 14, 2017, at an enterprise value of about $7.8 billion.

So the first data-center REIT bought the second. The wholesale pioneer that had mothballed a $270 million Santa Clara project in 2008 now commanded a $7.6 billion enterprise value. Its big cloud tenants became Digital Realty's tenants.

The Jilted Bride

The third deal had a backstory.

By the spring of 2015, Interxion, a European data-center operator, had agreed to an all-stock merger with a rival, TelecityGroup, valued at $2.2 billion. Then Equinix came along with a better offer for Telecity, as we'll see in the next section. Telecity dropped Interxion.

Interxion and Digital Realty spent the next four years circling each other. According to Digital Realty's exchange-offer prospectus, they first met in March 2016, and talks broke off and restarted four times, through data rooms and draft purchase agreements, before the final round began in August 2019. On October 10, 2019, an industry publication reported that Interxion was drawing interest, and the leak didn't scare up a rival. Only after signing did Digital Realty learn that, over four years, Interxion had held "extensive contacts" with "eight counterparties," including "a sovereign investment fund." None of them bid.

On October 29, 2019, Digital Realty agreed to combine with Interxion in a deal worth about $8.4 billion, including net debt. Interxion's shareholders would get Digital Realty stock worth about $93.48 a share and own about 20 percent of the combined company. Interxion brought fifty-three data centers in eleven European countries. Together, the companies would reach about 70 percent of Europe's GDP. Interxion's CEO, David Ruberg, said the goal was to "build the world's preeminent data center provider."

The deal closed on March 12, 2020, three days after Zayo became a private company.The exchange ratio was fixed at 0.7067 Digital Realty shares per Interxion share, based on Digital Realty's $132.28 close on October 28, 2019. The exchange offer expired at 12:01 a.m. on March 12, 2020, with about 92.3 percent of shares tendered. Digital Realty's prospectus puts the 0.7067 ratio at about an 18 percent premium to Interxion's unaffected close of $78.14 on October 9, 2019, the day before the press report. Because fewer than 95 percent were tendered, the remaining holders were paid through a Dutch liquidation distribution, generally subject to 15 percent Dutch withholding tax. The merger release said Ruberg would run Digital Realty's European business, branded "Interxion, a Digital Realty company," for about a year after closing.

Add it up. In under five years, Digital Realty spent about $1.9 billion in cash on Telx and issued stock for DuPont Fabros and Interxion in deals worth about $16 billion more, including debt. It went from a wholesale landlord in the United States to a global company that did wholesale and retail, in America and Europe. Did it overpay? The stock-for-stock structure meant Digital Realty's shareholders shared the risk with the sellers, which is the honest way to do a big deal. It also meant Digital Realty didn't have to answer that question in cash.

Equinix—Steve Smith and Charles Meyers#

When we last left Steve Smith in Chapter V, he had taken over Equinix in 2007 and spent the Phoenix years expanding it, from IXEurope to Switch and Data. Steve is a friend of mine. He ran Equinix for about a decade and later took my old chair at Zayo. I'll tell what the record shows here and leave the color to him.

Telecity

On May 29, 2015, Equinix agreed to buy TelecityGroup for £2.35 billion, about $3.6 billion, in cash and stock. The price was a 27.3 percent premium to Telecity's share price before the talks were disclosed.The terms were 572.5 pence in cash plus 0.0327 of a new Equinix share for each Telecity share, about 1,145 pence in all. The premium is measured against Telecity's May 6, 2015 close. Telecity's holders would own 10.1 percent of the combined company, and Telecity's executive chairman, John Hughes, joined Equinix's board. Reuters put the price at £2.35 billion; The Register reported £2.3 billion. Telecity's board dropped its $2.2 billion deal with Interxion to take it.

Smith explained the logic in one sentence: "Their customer base and footprint are more complementary to where we needed to go next." Equinix had roughly a hundred data centers at the time. Telecity added thirty-nine in Europe.

By the time the deal closed, on January 15, 2016, Equinix's share price had moved enough that the value had grown to about $3.8 billion. Equinix gained more than forty data centers, roughly doubled its European capacity and entered seven new countries: Bulgaria, Finland, Ireland, Italy, Poland, Sweden and Turkey. Together with another acquisition, Bit-isle, Telecity took Equinix from 105 data centers in thirty-three metros to 145 in forty.The closing value was about $1.7 billion in cash plus about 6.8 million Equinix shares worth about $2.1 billion, or about £2.6 billion in all. The 145-data-center count is after divestitures the European Commission required. Eight of the divested sites went to Digital Realty for about $874 million in July 2016. "Today is a very important day for Equinix," Smith said.

Verizon's Data Centers

The next deal reversed one of the bigger bets of the Phoenix years.

As we saw in Chapter V, Verizon had bought Terremark in 2011 for about $1.4 billion of equity, to build a cloud business on top of Terremark's data centers. Verizon already owned the data centers it had inherited from MCI. By 2016, Verizon had decided to focus on wireless and its FiOS fiber-to-the-home business.

At the time of that deal, Terremark ran thirteen data centers and Verizon more than 220. Verizon's plan was to marry Terremark's cloud and hosting skills to Verizon's enterprise customers. It was the same plan the carriers had pitched in the Gold Rush, when Qwest built CyberCenters and Level 3 built Gateways. The phone company would own the network and the buildings, and sell the customer both.

In December 2016, Equinix agreed to buy twenty-nine of Verizon's data centers in the United States and Latin America for $3.6 billion in cash. The sites had 2.4 million square feet and about nine hundred enterprise and government customers in fifteen metros. Verizon kept its managed-hosting and cloud businesses. It said the sale would "focus resources in areas that will help drive digital transformation for enterprise customers." Smith said the deal "significantly increases the size and sophistication of our enterprise and government ecosystems."The Register counted twenty-nine data centers, twenty-four of them customer-facing. Washington Technology's headline at closing called it a "$3B deal" but its text gave the estimated $3.6 billion. I haven't read Equinix's own closing release, so the exact closing date is unconfirmed.

The deal closed around May 1, 2017. Seven of the data centers were in Virginia, and four of them supported government interconnection. About six hundred of the customers were new to Equinix. After the deal, Equinix had 175 data centers in forty-four markets and 17 million gross square feet.

Was Verizon right to sell? Verizon had paid about $1.4 billion for Terremark's equity in 2011 and sold twenty-nine data centers for $3.6 billion five years later. Those aren't the same assets, so the comparison flatters Verizon. But the direction was clear. The phone company wanted out, and the company that knew what to do with the buildings wanted in.

xScale

By 2019, Equinix had a problem that came straight out of Chapter VI. Its business was retail: thousands of customers renting cages and paying for connections. Its biggest growth opportunity was the cloud companies, which wanted whole buildings at wholesale prices. Should Equinix build those on its own balance sheet, where lower wholesale returns would sit next to its higher retail ones?

The answer was to borrow someone else's balance sheet. On July 1, 2019, Equinix announced a joint venture with GIC, Singapore's sovereign wealth fund, worth more than $1 billion, to build six hyperscale data centers in Frankfurt, London, Amsterdam and Paris, with about 155 megawatts of capacity. GIC would own 80 percent and Equinix 20 percent. Equinix contributed two sites, LD10 in London and PA8 in Paris. The target customers were Google, Microsoft, Oracle, AWS and Alibaba Cloud. Equinix called it xScale.

Charles Meyers announced it for Equinix: "we are tremendously excited to announce the formation of our first xScale data centers joint venture."Meyers was Equinix's president and CEO. Smith had resigned early in 2018, and Meyers, then a senior Equinix executive, was named CEO on September 12, 2018, after Peter Van Camp's stint as interim CEO. The agreement was signed on June 27, 2019, and Equinix and GIC completed the joint venture's formation on October 9, 2019. Equinix insisted it wasn't entering the wholesale business broadly. Fitch upgraded Equinix's credit rating to BBB the same day.

The retail king had found a way to serve the hyperscalers without carrying the buildings on its own balance sheet alone. Most of the money came from a sovereign fund. That kind of money was about to show up everywhere in this business.

Steve Smith, as I wrote in Bandwidth, went on to replace me as Zayo's CEO in 2020, six months after Zayo went private. Which brings us to the man who bought Zayo.

DigitalBridge—Marc Ganzi#

In the mid-2010s, I met Marc Ganzi for the first time at a small investor conference at the Deer Valley Resort in Utah. As I wrote in Bandwidth, when I introduced myself, he asked with a beaming smile, "You know what investors call me?" I shrugged. "They call me the Dan Caruso of Towers." He paused, smirked and added, "And you are known as the Marc Ganzi of Fiber."

Ganzi had co-founded Global Tower Partners in 2003 and sold it to American Tower in 2013 for $4.8 billion. That same year, he and Ben Jenkins, a former Blackstone executive, co-founded Digital Bridge to focus, as I described it in Bandwidth, on the broader communications-infrastructure sector.

Ganzi and I were, as I wrote in Bandwidth, cut from the same control-freak cloth. We both needed to be the top dog, and I couldn't imagine a scenario where I'd work for him. His record in data centers follows a playbook any fiber roll-up veteran would recognize: buy a platform, keep a strong operator in charge and grow it with more acquisitions.

The Platforms

Digital Bridge's first data-center platform was DataBank, a Dallas company it bought from Avista Capital Partners in July 2016. The price wasn't disclosed.Terms weren't disclosed. Ganzi told Reuters the deal was "a great launching pad to do more investments in data centers."

Its second was Vantage, the Santa Clara wholesale developer Silver Lake had launched in 2010. In March 2017, Digital Bridge, PSP Investments and TIAA Investments bought it, again for an undisclosed price. Vantage had 51 megawatts built in Santa Clara, room to grow to 93, and a 6-megawatt campus in Quincy, Washington, the potato town of Chapter VI. Sureel Choksi stayed as CEO. The new chairman was Michael Foust, Digital Realty's co-founder, who had been its CEO when it went public as the first data-center REIT.

Ganzi summed up his thesis in one line: "The data center space is actually in the early innings."

Zayo

Then Ganzi came for Zayo.

The full story of the Zayo sale is in Bandwidth, and I won't retell it here. The short version: in 2018, with activist investors Starboard Value and Sachem Head pressing the company and its stock well off its highs, Zayo drew interest from two groups of the largest infrastructure investors in the world. One was a consortium of Blackstone, I Squared, KKR and Stonepeak, partnered with Zayo's biggest private investors, Charlesbank and GTCR. The other was Ganzi's Digital Colony, teamed with EQT. Both were serious, well-financed bidders.

The merger proxy Zayo filed in June 2019 gives the dates, in the flat language lawyers use. In mid-July 2018, at Ganzi's suggestion, he and I met in Aspen. We met again in Boulder in early August. On October 19, Ganzi called about buying Zayo together with its management. On November 6, just before a Zayo board meeting, he said he was arranging a "fully financed proposal" at $41 to $42.50 a share. Two days later, Zayo reported earnings and announced a plan to separate the company in two, and the stock fell from $30.38 to $22.56.

The bids that followed never got near Ganzi's talk. The proxy doesn't name the bidders; it calls the first group Consortium A and the Digital Colony and EQT group Consortium B. Consortium A bid $33.00 in November, raised to $35.00 in December, cut to $31.50 after due diligence in February 2019 and offered $32.00 as its "best and final." The board's answer was that "the Company would not be transacting at $31.50 per share and that any leaks would not be tolerated." Consortium B had put a written range of $36 to $38 in front of the board in December 2018. Its final price was $35.00.Zayo Group Holdings, definitive proxy statement, June 26, 2019, "Background of the Merger." The proxy's parties are anonymized; the names in the text are from Bandwidth, which calls the two groups "Wind" and "Sun." Consortium A's bids were $33.00 (November 16, 2018), $34.50 (November 19), $35.00 (December 7), $31.50 (February 4, 2019) and $32.00 (February 20). Ben Jenkins of Digital Colony sent Consortium B's $36–$38 range on December 16, 2018, during a board meeting.

On May 8, 2019, Zayo agreed to be acquired by affiliates of Digital Colony Partners and the EQT Infrastructure IV fund for $35 a share in cash, about $14.3 billion including $5.9 billion of net debt. In the press release, I said, "Digital Colony and EQT share our vision that Zayo's Fiber Fuels Global Innovation." In the memo to our employees that morning, I wrote, "I am incredibly proud of the company we have built and am excited about Zayo's future."Bloomberg put the equity value at $8.2 billion and the premium at 14.3 percent to the prior day's close. Zayo's release measured the premium as 32 percent against the six-month volume-weighted average price of $26.44. Zayo's shares had peaked at $39.35 the previous July and fallen as low as $20.46 before the company announced a strategic review in March 2019. Bloomberg called it the largest transaction EQT had announced in its twenty-five-year history.

The deal closed on March 9, 2020. As I wrote in Bandwidth, it became the second-largest leveraged buyout since the 2008 financial crisis. Six months later, I left, and Steve Smith took over.

zColo

Zayo's own data centers, zColo, had been for sale for most of that time. The proxy records the process. On December 21, 2018, a Canadian-headquartered alternative asset manager, called Party A in the filing, phoned me "to discuss a potential purchase of the Company's colocation business, rather than all of the Company." On March 6, 2019, Zayo "began to formally solicit interest." J.P. Morgan contacted about fifty parties, and twenty-one signed confidentiality agreements. On April 10, four bids came in. The highest was Party A's, "generally in line with management's valuation expectations." Consortium B's $35 offer was conditioned on the proceeds of any zColo sale staying inside Zayo.Same proxy. J.P. Morgan's count later rose to fifty-two parties, and the twenty-one confidentiality agreements were signed between March 19 and April 8, 2019. The proxy doesn't name Party A, and this book doesn't either. MoffettNathanson's views are from Del Deo and Sydney Marks, "Zayo: Plan A, Version 2.0… A Closer Look at zColo," March 4, 2019, and Del Deo, "Zayo: Q2 F2020 Earnings: Good Night, and Good Luck," February 4, 2020. Data Center Frontier did not disclose the zColo price; Table 7.1 uses Data Center Knowledge's figure of about $1.2 billion for thirty-nine sites; other reports were higher.

In Bandwidth, I called the data-center sale "more as a ruse than a contingency plan," a bit of noise to keep both bidders on their toes. The filing shows the noise was run as a real auction, with a real price.

The outside view of zColo was cooler. In March 2019, MoffettNathanson's Nick Del Deo valued it at about twelve to thirteen times EBITDA and concluded that its "modest contribution to the overall business means it wouldn't deliver much of a punch." In Zayo's last quarter as a public company, he reported, zColo's revenue fell 5.3 percent from a year earlier.

zColo didn't sell while Zayo was public. As we saw in Chapter VI, the new owners sold it to DataBank in September 2020. Digital Colony owned part of the seller and most of the buyer, and Colony put $145 million from its own balance sheet into the deal to keep its 20 percent stake in DataBank. Data Center Frontier reported that zColo added forty-four data centers in twenty-three markets, taking DataBank from twenty data centers to sixty-four. Data Center Frontier quoted me on the deal: "This agreement allows both parties to focus on their core strengths." About $600 million of the proceeds went to Zayo's investors.

Colony

The most surprising part of Ganzi's arc happened at the same time.

In July 2019, two months after the Zayo agreement, Colony Capital, the real-estate investment firm founded by Tom Barrack, agreed to buy Digital Bridge Holdings for $325 million. The plan was for Ganzi to become Colony's CEO in eighteen to twenty-four months, with Barrack returning to executive chairman. Colony managed about $43 billion of assets, and the deal would take it to about $60 billion. Barrack called Ganzi "an exceptional choice."

Ganzi became CEO of Colony in 2020. Then he did something few CEOs of a big, diversified company would try: he sold off most of what wasn't digital. Colony sold about $2.7 billion of legacy assets to Fortress. On June 22, 2021, Colony Capital became DigitalBridge Group, trading on the New York Stock Exchange as DBRG. Ganzi's goal was to rotate $100 billion of assets under management from diversified real estate to digital infrastructure. Pro forma, the firm was 80 percent of the way there.

"We are poised to build, operate, and finance a new era in connectivity," he said.

Think about the round trip. In 2019, Ganzi sold his company to Colony for $325 million. Two years later, Colony had taken his company's name, his strategy and his leadership. The buyer had become the bought.

Switch

Ganzi's biggest data-center deal came last.

When we last left Rob Roy in Chapter V, he was a Las Vegas real-estate kid who had bought a small former Enron Broadband building, wired to many carriers, for about $930,000 at a private bankruptcy sale in late 2002.The details of Switch's Enron origin are murky. Court records cited by Data Center Knowledge name the buyer as "Colo Gateways," not Switch or Roy, and put the building at 12,000 square feet, so the Enron facility was not the later SuperNAP. Switch's own 2017 IPO prospectus, in the portion I read, doesn't mention Enron. See Chapter V. Twenty years later, his company, Switch, was one of the largest listed U.S. data-center companies after Digital Realty and Equinix, according to Bloomberg. It had opened its fifth "Prime" campus, in Texas, in 2021 and planned more than 11 million square feet of additional space by 2030.

Switch's proxy shows a real contest. Its bankers contacted sixteen potential buyers, and nine signed confidentiality agreements. In the first round, in March 2022, DigitalBridge bid $34.00 a share and a rival the proxy calls Bidder A bid $32.50. Then the buyers hit a snag that only a Phoenix company could produce: some of Switch's Las Vegas sites sat on land owned in part by one of its own directors, and the bidders needed the leases changed to finance the deal. The owners refused, and offered to sell the land instead, for $300 million. In May, Bidder A dropped to $29.00, citing the cost of financing, and then came back at $32.50 on the condition that Switch sign that day. DigitalBridge and IFM held at $34.25, "best and final," a price that also had to cover the land and a $75 million buyout of a tax agreement.

On May 11, 2022, DigitalBridge and IFM Investors agreed to buy Switch for $34.25 a share in cash, about $8.4 billion for the equity and about $11 billion including debt. The price was a 19 percent premium to Switch's share price before Bloomberg reported a sale process. Bloomberg's sources named the losing bidder as Brookfield Asset Management.The premium is measured against Switch's March 18, 2022 close. The proxy calls the rival "Bidder A"; it cites the May 3 and May 9, 2022 press reports that named Brookfield. The Las Vegas land purchase arose because director Tom Thomas had an ownership interest in the sites; he recused himself. Roy's share of the tax-agreement buyout was about $11.7 million. Switch's special committee approved the deal unanimously. Goldman Sachs and Morgan Stanley advised Switch; RBC led for the buyers, with TD as co-adviser and debt lead.

Roy pointed to "our advanced datacenter infrastructure" and the "significant expansion capacity in our land bank." According to the proxy, Roy and Thomas Morton rolled about $500 million of their equity into the new company. The deal closed in December 2022.

From $930,000 for an Enron building to about $11 billion, in twenty years. That's the kind of Phoenix story Bandwidth was built on.

The tower guy who called himself the Dan Caruso of Towers now ran a firm whose platforms included DataBank, Vantage and Switch. The record shows he moved into data centers before most of the big infrastructure investors did, and through 2022, "early innings" looked right. The record also shows a firm that had bet its whole identity on one sector, which is a fine strategy until the sector stumbles.

The Take-Private Wave—Blackstone, KKR, GIP and American Tower#

In Chapter VI, four wholesale developers went public as REITs: DuPont Fabros, CoreSite, CyrusOne and QTS. By the end of 2022, none of them was still public. Digital Realty bought DuPont Fabros. Blackstone took QTS private, KKR and GIP took CyrusOne, and American Tower, a public company itself, bought CoreSite. DigitalBridge took Switch private too.

Blackstone and QTS

QTS's proxy opens its account of the sale with a sentence that could stand as this chapter's thesis: "Building and managing data centers is an inherently capital-intensive business." QTS expected to spend about $1 billion on construction in 2021. It had raised about $860 million of new equity since January 2020 and had sold stock in "nearly 70% of the months." It was on a treadmill, and it knew it. In 2018, it and its bankers "contacted approximately 30 parties" looking for capital. Only one deal came of it, a joint venture on a single building in Manassas.

Blackstone first met QTS in December 2018, as a "capital provider." The relationship took two and a half years to turn into a bid. In September 2020, QTS's Chad Williams and Jeff Berson met Blackstone in Connecticut. A private-equity firm, an infrastructure fund and two pension funds looked and passed on price. After a dinner in New York on May 6, 2021, Blackstone offered $75.00 a share in writing. It went to $75.75. QTS's board asked for $78.00, and on May 14 Blackstone agreed. Blackstone also agreed to pay a reverse termination fee of 11 percent of QTS's equity, "more than $800 million," if it walked. During a forty-five-day window to shop for a better offer, the bankers contacted seven more parties. None bid.

On June 7, 2021, QTS announced that it would be acquired by Blackstone funds for $78 a share in cash, about $10 billion including debt. The price was a 21 percent premium to QTS's closing price the previous Friday, $64.49.The sources measure the deal differently. QTS's proxy puts the premium at 24.5 percent to the May 14, 2021 close of $62.64, the day Blackstone agreed to $78. The proxy also gives QTS's termination fees as percentages of both equity value and enterprise value, and those ratios imply an enterprise value of about $10 billion, matching Blackstone's release. MoffettNathanson's Del Deo and Michael Srour put the equity value at about $6.0 billion and the enterprise value at about $8.5 billion. I have used the SEC filing. The proxy also says Williams's affiliates were expected to receive about $140 million to $150 million in cash. QTS had gone public in 2013 at $21. Eight years later, Chad Williams's shareholders were being paid about 3.7 times the IPO price, before dividends.

The buyers were Blackstone Infrastructure Partners and Blackstone Real Estate Income Trust, known as BREIT, along with other Blackstone vehicles with what the firm called perpetual capital: money that doesn't have to be returned to investors on a fixed schedule. "We are focused on investing in assets that are benefitting from strong, secular tailwinds," said Tyler Henritze of Blackstone Real Estate. Greg Blank of Blackstone Infrastructure Partners said Blackstone was "delighted to back QTS and its world-class management team as they continue to scale the company."The premium was 24 percent against QTS's ninety-day volume-weighted average price. QTS would be jointly owned by Blackstone Infrastructure Partners and BREIT. Blank said QTS aligned with "one of Blackstone's highest conviction themes – data proliferation."

That phrase, perpetual capital, is the key to this whole chapter. A traditional private-equity fund buys a company, improves it and typically sells it within several years. A perpetual-capital vehicle can hold an asset indefinitely, the way a pension fund holds a bond. For that kind of owner, a data center leased to a cloud giant on a long lease looks less like a real-estate bet and more like a bond with upside. And it solves QTS's problem. A company that had to sell stock most months to keep building could now draw on an owner that never had to sell anything.

Not everyone thought QTS was worth it. On the day of the deal, Del Deo raised his target to the $78 deal price and admitted, "We've long struggled with QTS's valuation." He admired the company's "scrappy mindset" but wrote that its "bottom line results have never quite matched its qualitative appeal."

KKR, GIP and CyrusOne

The CyrusOne deal was the biggest of the wave. KKR and GIP agreed to pay $90.50 a share in cash, about $15 billion including debt, a premium of about 25 percent to CyrusOne's share price before rumors of a sale.The 25 percent premium is measured against CyrusOne's unaffected close on September 27, 2021, before reports of a sale. Data Center Frontier reported a premium of 2.5 percent, measured against the Friday close just before the announcement, after the rumors had already lifted the stock. CyrusOne had gone public in 2013 at $19. The buyout price was almost five times that, before dividends.

The deal also came at a moment of turmoil at the top. CyrusOne had more than forty data centers and about 190 of the Fortune 1000 as customers. But its CEO, Bruce Duncan, had left in July 2021 after about a year in the job, and co-founder Dave Ferdman had returned as interim CEO, the company's fourth chief executive in about eighteen months. "This transaction is a testament to the tremendous work by the entire CyrusOne team," Ferdman said.

Was the churn a reason to sell? CyrusOne's proxy suggests it was. CyrusOne had tried to sell itself once before, in 2019. Its bankers contacted more than fifteen parties, and KKR's group said any bid "would likely be lower than the then-current trading price." That process died. Duncan left on July 29, 2021. Thirteen days later, on August 11, the first bid arrived, at $80 a share.

What followed was a crowded auction. After the press reported the sale process in late September, fourteen potential buyers called. Bids came in at $82, $82.50 and $82 to $85. One bidder cut its price and lost its access to the data room. KKR's original partner dropped out in October, and KKR asked to team up with GIP instead. On November 14, 2021, the last day, KKR and GIP bid $90.50 a share against a rival's $86.00. The board took the higher number that evening.

KKR was a newcomer to data centers through a platform called Global Technical Realty. GIP managed more than $79 billion. The deal closed in late March 2022.CyrusOne Inc., definitive proxy statement, December 30, 2021, "Background of the Merger." The 2019 approach that started the failed process was an all-stock offer of about $64.62 from a competitor; eleven parties signed confidentiality agreements. The rival in the final round, "Party C," had demanded and received reimbursement of up to $7.5 million of expenses. MoffettNathanson put CyrusOne's enterprise value at $14.8 billion. CyrusOne's closing release is dated March 25, 2022. Advisers: Goldman Sachs, Barclays, Wells Fargo, Citigroup and J.P. Morgan for KKR and GIP; Morgan Stanley and DH Capital for CyrusOne.

There's a footnote to the CyrusOne story that I enjoy. As I wrote in Bandwidth, Brookfield Infrastructure won a bidding war with Macquarie in 2020 to buy Cincinnati Bell, the old phone company that had spun CyrusOne off. Both the parent and the child ended up owned by infrastructure funds.

American Tower and CoreSite

The CoreSite deal was the strangest of the four, and the one that ties most directly back to Bandwidth.

It didn't start as a bid. According to CoreSite's filing on the tender offer, on March 5, 2021, an American Tower executive, Steve Baker, emailed CoreSite's CEO, Paul Szurek, about "deploying data centers on American Tower real estate." It was a partnership idea for edge computing. In late July, the CEO of another communications-infrastructure company, Party A in the filing, raised a merger over breakfast, and in August it offered all stock, worth about $161.72 a share. In August, Szurek asked American Tower's Tom Bartlett whether his company wanted to do a deal. It did. In October, American Tower bid "in the area of $165.00." On the day the final bids came in, November 11, Del Deo wrote that CoreSite's "unique assets and a tower operator described as expressing interest" set it apart. That day American Tower bid $170 a share, all cash, against Party A's package worth about $164.58.

American Tower paid $170 a share, about $10.4 billion including debt, for CoreSite, the Denver REIT that had gone public at $16 in 2010. That's more than ten times the IPO price in eleven years. CoreSite had twenty-five data centers, twenty-one on-ramps to the cloud providers and more than 32,000 interconnections in eight U.S. markets. Its annualized revenue was $655 million and its adjusted EBITDA $343 million.

Let's do the arithmetic. $10.4 billion divided by $343 million of annualized EBITDA is about thirty times.The revenue and EBITDA figures are CoreSite's own, for the third quarter of 2021, annualized, as stated in the merger release. The merger release gave about $10.1 billion including debt; American Tower's later 10-Q put the total consideration at about $10.4 billion including assumed and repaid debt, and I have used the filing. On the release's $10.1 billion, the multiple is about twenty-nine times. MoffettNathanson's Del Deo and Michael Srour also put the enterprise value at about $10.4 billion and the multiple at about thirty times their estimate of the next twelve months' EBITDA, adjusted for construction in progress and backlog. Bloomberg put CoreSite's prior Friday close at $166.59 a share. The scene comes from CoreSite's Schedule 14D-9, November 29, 2021; it doesn't name Party A. After losing, Party A's lawyers asked for its information to be returned or destroyed.

Why does that number matter to me? In Bandwidth, I told how a talented young MoffettNathanson analyst named Nick Del Deo initiated coverage of Zayo during our 2014 IPO road show with a report comparing dark fiber to towers. He called towers "almost universally viewed as the best business model in telecom, if not one of the greatest business models of all time." Towers traded at about twenty-five times their profitability. Bandwidth companies like Zayo traded at eight to twelve times. Del Deo's verdict on whether dark fiber deserved the tower multiple was "close but no cigar."

Seven years later, a tower company paid a tower-plus multiple for a data-center company, and the same analyst was there to price it. On the morning of November 15, 2021, Del Deo opened his note, "This morning, something very unusual transpired: two acquisitions in one day." By his own adjusted measure of the next twelve months' EBITDA, American Tower was paying about thirty times for CoreSite, and KKR and GIP about twenty-three times for CyrusOne. He called the American Tower deal "far more interesting." Two years later, in a note titled "Data Centers through a Tower Lens," Del Deo was running data centers, not dark fiber, through the tower test.

And it was American Tower that did it. As I wrote in Bandwidth, of the three big U.S. tower companies, two, American Tower and SBA, "decided to stick to their knitting" while Crown Castle spent more than $11 billion buying fiber. Now American Tower had left its knitting too, just in a different direction. Tom Bartlett of American Tower explained it as a bet on the edge of the network: "We are in the early stages of a cloud-based, connected and globally distributed digital transformation." The idea was that wireless networks and data centers would converge, and the company that owned both the towers and the buildings where the networks met would win.

The deal had one more connection to this chapter's cast. Eight years earlier, in 2013, American Tower had paid $4.8 billion for Marc Ganzi's Global Tower Partners. The tower company that bought Ganzi's towers was now following Ganzi into data centers.

Was he right? Elliott Investment Management's later campaign against Crown Castle's fiber strategy, which I described in Bandwidth, is a warning about tower companies straying from towers. But data centers aren't fiber, and CoreSite's interconnection business looked a lot more like Equinix than like Crown's fiber. The jury was still out when this chapter closes. The deal closed on December 28, 2021. "We are thrilled to welcome CoreSite's exceptional team to American Tower," Bartlett said.

Let's put the wave in perspective. In February 2000, at the top of the Gold Rush, Exodus had a Market Value of more than $20 billion. Twenty-one months later, twenty-eight of its data centers sold for $560 million in cash. Twenty years after that, four data-center companies sold for about $46 billion in eleven months. The difference wasn't the buildings. Exodus's buildings were fine too. The difference was the tenants. Exodus rented to dot-coms that could vanish in a quarter. QTS, CyrusOne, CoreSite and Switch rented to the cloud companies and to enterprises that had moved their computing into somebody else's building for good.

The Infrastructure Funds—Stonepeak, EQT, Brookfield and Macquarie#

In Bandwidth, the infrastructure funds got a long footnote: a list of the fiber companies they bought between 2014 and 2020. In this book, they get a section, because by 2022 they owned a large share of the data-center industry.

The list was long, and many of the names will show up again here. In 2017, KKR bought 40 percent of Telxius, Telefonica's fiber spinout. In 2018, EQT funded a European roll-up of IP-Only, GlobalConnect and Broadnet. In 2019, Macquarie Infrastructure Partners bought Bluebird Network. In 2020, Stonepeak bought Level 3's South American business and branded it Cirion, and Digital Colony bought a majority of Beanfield. The funds learned digital infrastructure on fiber. Then they turned to the buildings at the end of the fiber.

Why did they pay so much? I explained the logic in Bandwidth using EQT as the example. The investors behind the infrastructure funds were mostly European pension and sovereign wealth funds, and at the time they were earning near-zero returns on their bonds. Infrastructure was seen as moderate risk. So they decided a mid-to-high single-digit return was a prudent trade-off. That lower cost of capital let them pay prices that were materially higher than anyone else would pay. If one bidder needs a high-single-digit return and the other needs a mid-teens return, the second bidder is going to lose the auction.

That is exactly what happened in data centers.

Stonepeak and Cologix

In February 2017, Stonepeak Infrastructure Partners bought a majority of Cologix and committed $500 million to grow it. Cologix had twenty-four data centers in nine U.S. and Canadian markets and about 1,600 customers. Its CEO and chairman was Grant van Rooyen, one of my colleagues from Level 3.Bandwidth spells his name "Van Rooyen"; Cologix's own releases and Data Center Frontier spell it "van Rooyen." The $3.0 billion recapitalization is from the title of Cologix's April 6, 2022 release as listed in Bandwidth's sources. Existing investors, including Columbia Capital, kept a material interest.

Stonepeak had been founded only in 2011 and managed more than $6.4 billion at the time of the Cologix deal. By the time it was bidding on Zayo a year and a half later, as I wrote in Bandwidth, it had $50 billion to invest. As I also wrote there, Cologix "had a great outcome for investors." In April 2022, Cologix announced that Stonepeak had completed a $3.0 billion equity recapitalization of the company.

EQT and EdgeConneX

EQT came next. In August 2020, five months after it closed on Zayo, EQT Infrastructure IV agreed to buy EdgeConneX from an investor group led by Providence Equity Partners. EdgeConneX operated or was developing more than forty facilities in thirty-three markets across North America, Europe and South America. The price wasn't disclosed.

The EQT partner quoted on the deal was Jan Vesely, the same Jan Vesely who had led EQT's side of the Zayo deal. "EQT has followed EdgeConneX's journey from its early years to its growth into a top data center industry player," he said. The fund that bought Zayo's fiber was now buying the buildings that fiber connected.

The Telcos Sell

The funds' biggest source of buildings was the phone companies.

In Chapter V, the telcos bought data centers at the top of the Phoenix. Verizon bought Terremark in 2011 for about $1.4 billion of equity. CenturyLink bought Savvis the same year for about $2.5 billion of equity, or about $3.2 billion including debt. The pitch both times was that a phone company with data centers and a cloud could sell more to its enterprise customers.

Five years later, both sold, and AT&T sold alongside them.

We've seen Verizon's sale to Equinix. In November 2016, CenturyLink agreed to sell fifty-seven data centers to a consortium of BC Partners, Medina Capital Advisors and Longview Asset Management for $2.15 billion in cash plus a minority stake in the new company valued at $150 million. The new company had more than 3,500 customers and 2.6 million square feet of raised floor.The new company was named Cyxtera Technologies. The deal closed on May 1, 2017, and the fifty-seven data centers had about 195 megawatts of power. CenturyLink's fifty-seven data centers and Savvis's portfolio aren't the same set of buildings, so the 2011-versus-2016 comparison in the text is directional, not exact. Its CEO would be Manuel Medina, the founder of Terremark, who had sold his own company to Verizon five years earlier.

Here's the part that hits home. CenturyLink used the proceeds partly to fund its $24 billion acquisition of Level 3, the company I co-founded. The data centers CenturyLink had assembled, Savvis's among them, helped pay for the fiber network I had spent the Boom building.

Then AT&T sold. In a deal announced in mid-2018 and closed at the start of 2019, Brookfield Infrastructure and its partners paid $1.1 billion for thirty-one AT&T data centers, eighteen in the United States and thirteen elsewhere, with more than a thousand customers. They named the company Evoque Data Center Solutions. AT&T said it would use the proceeds to bring its debt down to about 2.5 times EBITDA by the end of 2019.The strategic alliance was announced in 2018. AT&T announced on January 1, 2019, that the sale had closed. Evoque joined AT&T's colocation ecosystem program, so AT&T could keep reselling the space.

Three phone companies, three exits, all for the same reason: they needed the money for their core businesses, or to pay down debt. As I wrote in Bandwidth, the big phone companies are "stuck in deep mud" when it comes to separating their bandwidth businesses from their core. Data centers were easier to separate. So they went first.

Macquarie

Macquarie took two routes into data centers. In April 2018, Macquarie Infrastructure Partners invested in Aligned Energy, a developer whose first data center opened in Plano, Texas, in 2015, sharing control with BlueMountain Capital. The CEO, Andrew Schaap, had come from Digital Realty. Aligned's cooling technology let customers like eBay, Lenovo and Telus scale up and pay only for the capacity they used, an idea that should sound familiar from the AWS section of Chapter VI.

Then, in April 2020, a Macquarie-led consortium bought 88 percent of AirTrunk, a hyperscale developer in the Asia-Pacific region, at a valuation above A$3 billion. AirTrunk had five data centers and more than 450 megawatts when fully developed. Its founder, Robin Khuda, kept a material stake and stayed on as CEO. "AirTrunk has established itself as the dominant player in the APAC hyperscale market," he said. Macquarie's Frank Kwok gave the investor's view: "Our investors are attracted to hyperscale data centre providers such as AirTrunk."Macquarie's September 2024 release on AirTrunk's sale names PSP Investments as its co-owner.

The Same Names

Look back at the firms that competed to buy Zayo in 2018 and 2019: Blackstone, I Squared, KKR and Stonepeak, with Charlesbank and GTCR, on one side, Digital Colony and EQT on the other. Now look at who owned the data-center industry by 2022. Blackstone owned QTS. KKR co-owned CyrusOne. Stonepeak owned Cologix. EQT owned EdgeConneX. DigitalBridge owned DataBank, Vantage and, by the end of the year, Switch. Brookfield, which lost Switch to DigitalBridge, owned Evoque.

The cast of the Zayo auction had become the owners of the data-center industry. It was a small club, and its members had all done the same math.

On the Eve#

By November 2022, the data-center business had been through a full Reconsolidation.

Two public giants stood on top. Digital Realty had absorbed Telx, DuPont Fabros and Interxion. Equinix had absorbed Telecity and Verizon's data centers and had found in xScale a way to serve the cloud companies with a sovereign fund's money. Of the wholesale REITs that went public in Chapter VI, none was left on the stock market. Private owners held most of the rest: Blackstone, KKR and GIP, American Tower, DigitalBridge, Stonepeak, EQT, Brookfield and Macquarie. The phone companies were out.

The new owners had paid prices that would have been unthinkable in 2002. They paid them for one reason: cash flow. A data center leased to a cloud giant for ten or fifteen years produced steady, rising rent from the best credit in the world. To an infrastructure fund, or to a perpetual-capital vehicle, that stream of cash looked as close to Buffett's "between now and doomsday" as anything in real estate. The 2008 crisis had proved that the tenants kept paying. The 2009 rebound had proved that investors would notice. And for investors earning near-zero returns on their bonds, a mid-to-high single-digit return on a data center looked like a bargain.

Did the high prices pay off for the companies that did the building? Years later, MoffettNathanson went back and measured. Its last industry-wide study of returns on invested capital used results through 2021, and it was the last time the study could be done across many operators, because CoreSite, CyrusOne, QTS and Switch had all been taken off the market. The answer was sobering. Operators without an interconnection business earned about their cost of capital, and no more. Equinix and CoreSite did better. "Absent a gaping valuation disparity," Del Deo wrote, "interconnection was the place to be." Digital Realty's return on capital fell more than 3 percentage points from 2018 to 2023, as prices and development yields fell.

What could go wrong? The bears had two answers. The first was concentration: a handful of tenants, each of whom could build its own buildings, and each of whom knew exactly what a building cost. The second was valuation: CoreSite at thirty times EBITDA had been priced like a tower, and towers don't need new buildings every few years to keep growing. The bulls had one answer, and it was the one Ganzi had given in 2017. It was still the early innings.

In the summer of 2022, both sides got a headliner. In July, the short seller Jim Chanos told the Financial Times he was raising money to bet against data-center REITs, naming Digital Realty and Equinix. The cloud, he said, was "their enemy, not their business," and "Their three biggest customers are becoming their biggest competitors." Bill Stein answered on CNBC: "I think Jim maybe isn't aware that demand has never been stronger in our space."

The same month, the thing that would decide the argument showed up, and it wasn't a tenant. In July 2022, Dominion Energy told its large customers that "transmission constraints in a pocket of eastern Loudoun County" would delay new connections. Some new data centers there might not get connected until 2026. Andy Power of Digital Realty called it "a bottleneck in a portion of Ashburn," not "a permanent feature." Stein predicted that "prices are going to go up, because supply is constrained." Ganzi called it "a bit of a wake-up call for the region."The Chanos and Stein quotes are from Bisnow, July 7, 2022, which also quotes Wells Fargo's estimate that the cloud companies leased about 60 percent of their needs in 2022. Dominion's notice and Power's quotes are from Data Center Frontier, July 29, 2022; Stein's and Ganzi's from Data Center Frontier, September 26, 2022, which reported that the constraints touched two-thirds of Loudoun's substations, with relief expected from a new 500-kilovolt line in 2026. The returns study is Del Deo and Chris Chae, "Data Centers: Do ROIC Trends Match the Narrative of the AI Boom?" MoffettNathanson, April 13, 2026. MoffettNathanson uses its own lifecycle depreciation rather than reported depreciation.

Neither side was forecasting what came next.

On November 30, 2022, OpenAI released ChatGPT.

Days later, in early December, DigitalBridge and IFM closed on Switch for about $11 billion.The closing release, "DigitalBridge and IFM Investors Complete $11 Billion Take-Private of Switch," is dated December 6, 2022, the day the deal closed. It was the last big deal of the Reconsolidation, and its buyers had priced it the way everyone in this chapter had priced data centers: as a steady stream of cash from a mature industry.

Was a data center a bond, or was it about to become the most contested real estate in technology? And if Ashburn was a preview, what would the buildings run short of first, space or power?

In Bandwidth, I borrowed Buffett's warning about the party where the clocks have no hands. The music was about to start again.

Table 7.1: The Reconsolidation's Data-Center Deals, 2015–2022#