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CenturyLink considers selling off its datacentre assets

Telco says growing its colocation business will require more capital expenditure than its willing to invest, prompting an investigation into what its options are

Telco CenturyLink is considering selling off its colocation assets, because it claims growing this part of its business requires more money than it is willing to invest right now.

The company confirmed it is working with a troop of financial advisors to explore the options for this portion of its business, before adding that it still expects colocation to remain part of its wider IT services portfolio once this process is complete.

“But we do not believe ownership of the physical datacentre assets is necessary to effectively deliver those services. Therefore, we are exploring all of the strategic alternatives available for our datacentres,” said CenturyLink CEO Glen Post, in a statement.

“We have not set a timetable for completion of this process and will take the time necessary to ensure we best position CenturyLink and deliver value to our shareholders, while remaining focused on providing our colocation customers excellent service.”

The company operates 59 datacentres in the US, Asia and Europe, although the vast majority are leased, rather than owned outright by the firm.

“The review of strategic alternatives will involve a full range of options including, but not limited to, a partnership or joint venture, a sale of all or a portion of the datacentres, as well as keeping some or all of these assets and operations as part of CenturyLink’s portfolio,” the statement continued.

The news was discussed further during a conference call to address the company’s third-quarter results, which saw its hosting arm post a revenue of $324m for the three months to 30 September 2015, down from $331m in same period a year before.

When asked during the call, transcribed by Seeking Alpha, for further details as to why the company has taken these steps, Post cited the recent upswing in valuations for businesses within the datacentre market.

“Valuations are obviously good right now. They can always change, but we know the market’s good. But that’s just one factor,” he said.

 “For us to really grow the colo business, it requires really more capital expenditure than we've been willing to put in the business. We said that up front, that we weren't going to invest heavily in the datacentres, that we felt they were a synergistic asset that we could grow with the rest of our business.

“However, with the valuations, we think our cash flow maybe could be used for investments that can drive higher returns, basically, and drive better shareholder value,” he added.

Read more about consolidation in the datacentre market

  • Equinix is to acquire fellow datacentre operator TelecityGroup for £2.35bn, resulting in the termination of an earlier merger bid by rival firm Interxion
  • The amount of datacentre space occupied by co-location providers is up by 11% on 2014, and is forecast to maintain that level of growth through to 2018 as enterprises look to outsource more of their IT

The timing of the announcement might strike some as a little strange given recent analyst projections about how enterprise demand for colocation services is set to rise in coming years, as firms look to outsource more of their IT.

However, competition in the sector is fierce, with recent findings from 451 Research suggesting there are more than 1,000 colocation providers operating across the globe, of which Equinix, AT&T and Sungard are among the most popular.

On the valuation point flagged by CenturyLink’s post, the colocation sector is undergoing a busy period of consolidation, with Equinix currently awaiting European Commission approval for its bid to acquire colocation rival TelecityGroup for $3.6bn.

Meanwhile, Digital Realty also set out plans to snap up rival datacentre systems supplier Telx in July 2015 for $1.89bn, as it seeks to beef up its colocation business.  

Speaking to Computer Weekly, Keith Breed, research director at datacentre market watcher Tariff Consultancy, said CenturyLink is the latest in a long line of telcos to consider drawing on their datacentre operations to raise capital.

"The datacentre business is attractive to external investors, such as private equity funds, who like the low customer churn rates," he said. "Telecom provider datacentre assets benefit from already being utilised by colocation customers, so there is relatively low risk to the new owner."

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