Activist fund Starboard helps information heart agency Cyxtera shut its valuation hole through SPAC merger

Enterprise: Cyxtera is a worldwide chief within the information heart colocation and interconnection companies. The corporate operates a footprint of greater than 60 information facilities all over the world, offering companies to greater than 2,300 main enterprises and U.S. federal authorities businesses. It gives information heart, colocation, enterprise utility cloud computing, hybrid cloud, cyber safety, and analytics options to authorities, enterprises, and repair suppliers. It gives Cyxtera Portal, enabling prospects to observe, handle, and management their digital infrastructure from a single, devoted platform; colocation companies; information heart companies; Cyxtera Extensible Knowledge Middle platform, a platform that transforms IT infrastructure design, configuration, and deployment. The corporate additionally gives AppGate SDP, a community safety platform to safe any utility; and AppGate Perception, which gives cloud and community architects visibility into all the community visitors. As well as, it gives menace analytics, protected searching, and detect monitoring companies.

Inventory Market Worth: $1.5B ($9.42 per share)

Proportion Possession: 21.80%

Common Price: $6.54

Activist Commentary: Starboard is a really profitable activist investor and has intensive operational activism expertise serving to boards and administration groups run corporations extra effectively and enhancing margins. That is their 102nd 13D submitting. In these 102 filings, they’ve averaged a return of 30.25% versus 13.76% for the S&P 500. Their common 13D maintain time is 18 months.

On July 29, 2021, Cyxtera Applied sciences, Inc. accomplished its enterprise mixture with Starboard Worth Acquisition Corp, the SPAC sponsored by Starboard Worth. In reference to the transaction, Starboard Worth Acquisition Corp. modified its identify to Cyxtera Applied sciences, and adjusted its inventory image from SVAC to CYXT. 

Starboard is an especially expert and revered activist investor who has created vital shareholder worth for themselves and different shareholders of their portfolio corporations. Nonetheless, this isn’t shareholder activism. Cyxtera was introduced public by a merger with a SPAC backed by Starboard, and now Starboard owns 21.8% of the corporate by itself, however holds 81.3% as a part of a 13D group with different traders pursuant to a Shareholders Settlement. This isn’t Starboard figuring out an undervalued public firm and being the catalyst to shut that valuation hole. That is Starboard utilizing their valuation and working abilities to carry a presumably pretty valued non-public firm public and creating shareholder worth by rising it and working it effectively.

Whereas the submitting implies that the Starboard Sponsor owns the low-priced inventory and the Starboard purchasers personal the high-priced shares, this isn’t the case, and Starboard really created a construction that could be very pleasant to the Starboard purchasers. All the economics (together with the sponsor shares and warrants) go to the Starboard purchasers and Starboard makes its hedge fund promote on any earnings identical to another Starboard portfolio funding. Consequently, Starboard traders are on this funding for an combination common value of $6.54 per share, as a substitute of $9.68 per share that the Starboard traders paid for his or her shares and the $1.07 per share the Founders paid for his or her shares. This utterly aligns Starboard’s curiosity with its traders and extra intently aligns it with the opposite shareholders of the corporate who’re in nearer to the $10 per share SPAC worth.

Cyxtera was beforehand owned by CenturyLink (now known as Lumen Applied sciences) earlier than it was bought to Medina Capital and BC Companions who partnered collectively to amass the property. Manny Medina and Nelson Fonseca, each of Medina Capital, had earlier expertise on this house collectively. Medina constructed Terremark Worldwide, with Fonseca as his second. Terremark Worldwide was finally acquired by Verizon and the 2 noticed firsthand how bigger connectivity corporations like Verizon and CenturyLink are good at promoting community entry however don’t focus as a lot on optimizing the information facilities.

So, when CenturyLink was promoting Cyxtera, Medina and Fonseca acknowledged a chance to run the Cyxtera information facilities in a extra centered method and with the power to supply connectivity and different companies to its purchasers by a number of carriers (not simply CenturyLink) along with different value-added options for his or her purchasers like information heart as a service or AI as a service resolution. Medina and Fonseca have been doing simply that for the previous 3.5 years however now are able to take it to the following stage by the merger with the Starboard SPAC.

The SPAC construction gives the corporate many benefits to permit it to develop at a faster fee. First, it has knowledgeable board (together with Jeff Smith of Starboard) with numerous expertise to supervise administration. Second, as a public, extra clear firm, it has far more credibility in attracting giant purchasers who can now do their due diligence faster earlier than signing long-term contracts and have the boldness that they’re coping with a public, authorities regulated entity. Lastly, having higher and faster entry to capital will enable the corporate to develop faster, whether or not inorganically or by M&A.

This could assist the corporate shut the massive valuation hole it has with its friends. It presently trades at an EV/EBITDA a number of of roughly 15x, whereas its friends commerce at a lot greater ranges — Equinix at 29.62x, Digital Realty at 30.89x, CyrusOne at 23.77x and Swap at 29.98x. Furthermore, Blackstone just lately acquired peer QTS Realty Belief at a valuation of 27x EBITDA.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.