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Morningstar | Digital Realty Enters South America With Acquisition of Ascenty; Maintaining $112 FVE

On Sept. 24, narrow-moat Digital Realty announced its acquisition of Brazilian data center provider Ascenty for about $1.8 billion, about 85% in cash. It expects the deal to close before the end of the year. Ascenty will be operated as a joint venture with Brookfield Asset Management--which will contribute about $613 million cash--with each firm owning 49% of the equity and 50% of the voting rights (a 2% equity interest is going to Ascenty's current managers, who will remain in place). Digital estimates that its $1.8 billion purchase price represents a multiple of about 15 on projected EBITDA. Though that is currently a 25%-30% discount to the average multiple of the bigger U.S. data center companies, we think it is fair given the additional risk we expect in Brazil. With no further details on Ascenty's financials, we are not adjusting our $112 fair value estimate.

The Ascenty acquisition is consistent with Digital's vision, in our view, though it is the firm's first foray into South America. Like Digital's, Ascenty's customers are largely global, hyperscale providers. Ascenty has 14 in-service and under-construction data centers across Sao Paulo, Rio de Janeiro, Caminas, and Fortazela. The size or location of each of these cities makes them attractive as connectivity hubs, which we think can lead to a critical competitive advantage and is a key aspect that can make data centers attractive. Digital's increased focus on connectivity recently led us to label its moat trend as positive due to a burgeoning network effect (its existing moat sources are switching costs and cost advantage). Digital believes Ascenty is the leading data center provider in Brazil and has 31% of the country's capacity, based on megawatts. With Equinix being the only major data center company with a South American presence (with six of its seven South American data centers in either Sao Paulo or Rio), Digital's entrance should position it well to be a leader in the growing market there.

Concurrent with the acquisition, Digital expects to take on an additional $575 million in debt and announced a forward sales agreement to issue at least 8.5 million shares, which should net the firm about $1 billion--some of which we expect to be used for a separate land acquisition the firm also announced on Sept. 24 (424 acres in Loudoun County, Virginia, for $236.5 million). With the stock trading at a slight premium to our fair value estimate, we think this was a good time to issue shares.