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Digital Realty to buy majority stake in Teraco valuing Africa’s operator at $3.5bn

The stabilized return is expected to improve significantly over time, as approximately 60% of Teraco's in-service portfolio was developed within the past two years and the existing development pipeline and land bank could expand the platform by nearly 150%.

By João Marques Lima

Founder and Editor, The Tech Capital

7 Mins

January 12, 2022 | 8:52 PM GMT

Digital Realty to buy majority stake in Teraco valuing Africa’s operator at $3.5bn

Teraco Chief Executive Officer Jan Hnizdo. Source: Teraco

Digital Realty (NYSE: DLR) has entered into a definitive agreement to acquire a majority stake in data centre operator Teraco, which will value the African business at approximately US$3.5 billion.

Digital Realty will own approximately 55% of the total equity interests in Teraco, while the remaining 45% will be held by a consortium of existing investors, including management, Berkshire Partners LLC, Permira, van Rooyen Group, Columbia Capital, Stepstone Ventures and the Teraco Connect Trust. 

The rolling equity investors in Teraco will have the opportunity to put their interests to Digital Realty between 3.5-5.5 years after closing, while Digital Realty will have the right to call those equity interests between 5.5-6.5 years after closing. 

A. William Stein, Digital Realty’s chief executive, said: “This highly strategic transaction immediately cements Digital Realty as the leading colocation and interconnection provider in Africa, a region experiencing rapid digital transformation. 

“Teraco is the industry leader in South Africa and the continent’s connectivity hub.  This investment will enhance our ability to serve customers on a global basis by adding significant regional scale with a premier, network-dense portfolio in South Africa’s most strategically important metros.  Teraco will also advance our strategy of increasing exposure to highly connected, network- and carrier-dense facilities to enhance our global coverage and connectivity capabilities.” 

The transaction is expected to be approximately 1% dilutive to Digital Realty’s core FFO per share in 2022, breakeven in 2023, and accretive to financial metrics and the growth trajectory of the combined organization thereafter. 

The Teraco investment will be financed through a combination of proceeds from Digital Realty’s private capital and capital recycling initiatives, committed funding under the existing forward equity commitment and other potential future financings.

The transaction is expected to close in the first half of 2022 and is subject to customary closing conditions. 

Solomon Partners is acting as financial advisor and Latham & Watkins LLP and Bowmans are acting as legal advisors to Digital Realty. 

Goldman Sachs is acting as financial advisor to Teraco and Weil, Gotshal & Manges LLP and ENSafrica are serving as legal advisors to Teraco.

Africa’s largest player

Teraco is the largest and most densely interconnected data centre platform in Africa, with seven facilities located in the key South African metros of Johannesburg, Cape Town and Durban.

The company has historically generated healthy double-digit growth in key financial metrics, including revenue, EBITDA and participants on its platform.

The Teraco platform contains 187 megawatts of total planned capacity, including seven in-service facilities totalling 75 megawatts and one development project totalling 19 megawatts currently under construction.

Teraco owns the freehold to six of its seven data centres, representing over 85% of total revenues and including its densely interconnected campus in Johannesburg.

In addition, Teraco owns land adjacent to its Johannesburg and Cape Town campuses that will support the development of up to 93 megawatts of additional capacity, representing significant embedded growth potential and providing considerable runway to support customer growth.

The provider serves over 600 customers, including more than 275 connectivity providers, over 25 cloud and content platforms and approximately 300 enterprises.

The operator facilitates approximately 22,000 interconnections between customers and its Isando campus in Johannesburg is one of the most densely interconnected sites in the world, with over 13,000 cross-connects.

Teraco also hosts seven on-ramps to global cloud service providers in Johannesburg and Cape Town and currently provides direct access to seven subsea cables in Durban on the east coast and Cape Town on the southwest coast.

The combination of Teraco’s position in South Africa with Digital Realty’s connectivity hubs in Nigeria on the west and Kenya on the east coast – along with Digital Realty’s Mediterranean interconnection hubs in Marseille and Athens – is expected to “significantly strengthen Digital Realty’s leading pan-African position”, enhancing the ability to serve local as well as multinational enterprises and service providers.

Teraco Chief Executive Officer Jan Hnizdo said: “We are excited to enter our next chapter by joining forces with Digital Realty to create a truly global, scaled platform serving our customers in Africa and beyond.  Our combined platform will be uniquely positioned to serve the full customer spectrum with the ability to support their growth around the world.

“We look forward to working with the Digital Realty team to extend our state-of-the-art data centre and connectivity solutions to capitalize on the favourable industry trends and tremendous market opportunity.”

Africa’s opportunity

The total addressable data centre market in Africa is expected to expand significantly over the next several years.

According to Turner & Townsend, the Africa data centre market size is expected to cross US$3 billion by 2025, growing at a compound annual growth rate of over 12 percent.

The sector has witnessed a steady growth in interest from major global cloud service providers such as AWS, Microsoft and Huawei over the last five years.

The total population of Africa is nearly 1.4 billion, or more than 15% of the world’s total population, with a median age of just 20 years.

Digital transformation is accelerating, and it is happening in South Africa first and radiating across the African continent.

South Africa’s economy is the third-largest in Africa, and South Africa is home to more than half of the region’s top 500 companies. The country contributes as much as six percent to Africa’s digital economy, according to Turner & Townsend.

The country also serves as either the worldwide or regional headquarters for many companies doing business elsewhere in Africa.

South Africa is the largest data centre market on the continent, although it is estimated that only a fraction of potential demand is being effectively addressed, given the relative scarcity of institutional quality data centre capacity.

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