Activist fund Starboard helps data center firm Cyxtera close its valuation gap via SPAC merger

Business: Cyxtera is a global leader in the data center colocation and interconnection services. The company operates a footprint of more than 60 data centers around the world, providing services to more than 2,300 leading enterprises and U.S. federal government agencies. It provides data center, colocation, enterprise application cloud computing, hybrid cloud, cyber security, and analytics solutions to government, enterprises, and service providers. It offers Cyxtera Portal, enabling customers to monitor, manage, and control their digital infrastructure from a single, dedicated platform; colocation services; data center services; Cyxtera Extensible Data Center platform, a platform that transforms IT infrastructure design, configuration, and deployment. The company also provides AppGate SDP, a network security platform to secure any application; and AppGate Insight, which provides cloud and network architects visibility into all of the network traffic. In addition, it offers threat analytics, safe browsing, and detect monitoring services.

Stock Market Value: $1.5B ($9.42 per share)

Percentage Ownership: 21.80%

Average Cost: $6.54

Activist Commentary: Starboard is a very successful activist investor and has extensive operational activism experience helping boards and management teams run companies more efficiently and improving margins. This is their 102nd 13D filing. In those 102 filings, they have averaged a return of 30.25% versus 13.76% for the S&P 500. Their average 13D hold time is 18 months.

On July 29, 2021, Cyxtera Technologies, Inc. completed its business combination with Starboard Value Acquisition Corp, the SPAC sponsored by Starboard Value. In connection with the transaction, Starboard Value Acquisition Corp. changed its name to Cyxtera Technologies, and changed its stock symbol from SVAC to CYXT. 

Starboard is an extremely skilled and respected activist investor who has created significant shareholder value for themselves and other shareholders of their portfolio companies. However, this is not shareholder activism. Cyxtera was brought public through a merger with a SPAC backed by Starboard, and now Starboard owns 21.8% of the company on its own, but holds 81.3% as part of a 13D group with other investors pursuant to a Shareholders Agreement. This is not Starboard identifying an undervalued public company and being the catalyst to close that valuation gap. This is Starboard using their valuation and operating skills to bring a presumably fairly valued private company public and creating shareholder value by growing it and operating it efficiently.

While the filing implies that the Starboard Sponsor owns the low-priced stock and the Starboard clients own the high-priced shares, this is not the case, and Starboard actually created a structure that is very friendly to the Starboard clients. All of the economics (including the sponsor shares and warrants) go to the Starboard clients and Starboard makes its hedge fund promote on any profits just like any other Starboard portfolio investment. As a result, Starboard investors are in this investment for an aggregate average cost of $6.54 per share, instead of $9.68 per share that the Starboard investors paid for their shares and the $1.07 per share the Founders paid for their shares. This completely aligns Starboard’s interest with its investors and more closely aligns it with the other shareholders of the company who are in closer to the $10 per share SPAC price.

Cyxtera was previously owned by CenturyLink (now called Lumen Technologies) before it was sold to Medina Capital and BC Partners who partnered together to acquire the assets. Manny Medina and Nelson Fonseca, both of Medina Capital, had previous experience in this space together. Medina built Terremark Worldwide, with Fonseca as his second. Terremark Worldwide was eventually acquired by Verizon and the two saw firsthand how larger connectivity companies like Verizon and CenturyLink are good at selling network access but do not focus as much on optimizing the data centers.

So, when CenturyLink was selling Cyxtera, Medina and Fonseca recognized an opportunity to run the Cyxtera data centers in a more focused manner and with the ability to offer connectivity and other services to its clients through multiple carriers (not just CenturyLink) in addition to other value-added solutions for their clients like data center as a service or AI as a service solution. Medina and Fonseca have been doing just that for the past 3.5 years but now are ready to take it to the next level through the merger with the Starboard SPAC.

The SPAC structure offers the company many advantages to allow it to grow at a quicker rate. First, it has a professional board (including Jeff Smith of Starboard) with diverse experience to oversee management. Second, as a public, more transparent company, it has much more credibility in attracting large clients who can now do their due diligence quicker before signing long-term contracts and have the confidence that they are dealing with a public, government regulated entity. Lastly, having better and quicker access to capital will allow the company to grow quicker, whether inorganically or through M&A.

This should help the company close the large valuation gap it has with its peers. It currently trades at an EV/EBITDA multiple of approximately 15x, while its peers trade at much higher levels — Equinix at 29.62x, Digital Realty at 30.89x, CyrusOne at 23.77x and Switch at 29.98x. Moreover, Blackstone recently acquired peer QTS Realty Trust at a valuation of 27x EBITDA.

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