American infrastructure specialist Digital Realty has agreed to acquire eight European data centers currently owned by its competitor Equinix.

The company will pay approximately $874 million for five facilities in London, two in Amsterdam and one in Frankfurt.

Equinix is required to sell off some of its estate in order to merge with the Telecity Group, in a transaction valued at approximately $3.8bn (£2.6bn). The clause was added by European regulators to stop the company from having a dominant position on the retail colocation market.

“We have made several recent strategic investments in Europe, and this new portfolio – which is concentrated in three of the most strategically important data center and interconnection hubs in Europe – will immediately bring on board a large, diversified customer base and will also provide significant opportunities to grow and extend our footprint across the continent for years to come,” said William Stein, CEO of Digital Realty.

Good for competition

Fish acquisition Equinix Telecity Interxion
– Thinkstock / KaeArt

According to Digital Realty, the portfolio of eight facilities contains approximately 213,000 square feet of white space and 24.4 megawatts of IT load, serving more than 650 customers.

The properties are 72 percent utilized - this means there are 6.9 MW of power capacity and 62,700 feet of white space remaining, with the potential to expand existing data centers to support another 14.9 MW worth of IT equipment.

Digital Realty will acquire a fee interest in one data center in Amsterdam and leasehold interests in the other seven facilities, lasting an average of 23 years.

In return, Equinix will get an option to acquire Digital Realty’s data center at rue Ambroise Croizat in Paris, for a purchase price of approximately $215 million. However this part of the deal is yet to pass regulatory scrutiny, and in the words of the company: “Digital Realty cannot assure when, or if, the option will be exercised.”

To finance the transaction, Digital Realty will be issuing 11,500,000 shares of its common stock, with another 1,725,000 shares reserved as an option for the underwriters.

“Selling to Digital has got to have caused them pain,” commented Nicola Hayes, analyst at Andrasta Consulting. “Before Christmas they were inundated with interest from investors, but they all fell by the wayside, because of the inherent difficulties in turning these sites into a new business.”

According to Hayes, Equinix would have preferred to sell the sites off piecemeal, preferably to newcomers, who would have trouble competing on a global stage.

She added that the deal involves old data centers which will require substantial upgrades - something that is difficult to achieve when the data halls are nearly full. Only a company already in the industry with existing data centers in these markets, such as Digital Realty, could pull this off.

Tim Anker of Colo-X added that the deal was “good news for the customers and people that worked in those data centers,” adding that Digital Realty’s possible move into retail colocation would be good for competition here: ”DRT, like other wholesale operaters is looking at the retail colocation market. That could make a viable alternative to Equinix, which would be quite interesting.” 

Digital Realty is using the brand of its recent retail colocation acquisition Telx for the US retail market, but has not yet shown signs of expanding that elsewhere. 

The deal with Equinix is expected to close in the second half of 2016 and is subject to customary closing conditions, including approval by the European Commission.