DuPont Fabros: A Look at the Head-Spinning Valuation

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So what do you get for $4,600 per rentable data center square foot? You purchase DuPont Fabros Technology Inc. (NYSE: DFT).

Behemoth is the best word I can use when describing REIT Digital Realty Trust Inc., (NYSE: DLR). After all the company has 157 data centers. Digital Realty Trust has entered into an agreement to acquire DuPont Fabros in an all-stock merger with an enterprise value of $7.6 billion. A deal that will put Digital Realty Trust eye to eye with Equinix.

In writing this I kept on going back to my third-grade math, something must be wrong with my calculations. DuPont Fabros has annual revenues of $560 million making this a 13.6X revenue transaction. It’s adjusted EBITDA is $335 million now we are looking at a 23X EBITDA deal. Wow.

Each of these companies run at a 50 percent to 60 percent, but they get there by taking separate roads. However, if you are looking for synergy, you can’t squeeze much more out of the lemon. Or can you?

DuPont has four new data centers coming online in 2017, two of which are already 100 percent released. The average revenue has per DuPont data center grosses $45 million a year, increasing revenue some $90 million, all of a sudden that 13.6 X revenue starts looking like 11X.

The question is the ability to deliver. DuPont is a cut above. It has higher-end clients. This transaction is all about the “super wholesale” and “hyperscale” markets which is DuPont’s focus. DuPont has “A” list customers such as Microsoft, Facebook, and Apple. This is what they bring to the party, a new type of customer, a customer that garners around 40 percent higher rates per square foot. And to throw another ring in the hopper, DuPont’s average customer lease contract is over 5 years.

There is only one problem. Except for two new data centers coming online, DuPont Fabros is sold out. No room to grow. In the corporate write-ups on the transaction, there is a great deal of attention that the two companies have overlapping density in the top MSA’s where only Dupont services.

Digital Reality has 26 million rentable s/f with a 10 percent vacancy rate, or 2.6 million any day of the week. Dupont Fabros has a total of 1.6 million rentable square feet with near zero vacancies. You do the math. There is more vacant space at Digital Reality then there is DuPont Fabros.

This is about long term transitioning. Moving select Digital Reality data centers and have them provide DuPont Fabro’s services. The average Digital data center grosses $14 million a year while the Dupont Fabros data center grosses $47 million in a marginally smaller facility.

The combined company will have $2.8 billion in revenues.

Later, Tom

Find out more about Tom Millitzer: Millitzer Capital FB

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