|Shares Out. (in M):||68||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,461||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||148||EBIT||0||0|
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Interxion is a premium, carrier-neutral colocation data center services provider in Europe with a simple, attractive business model, a wide economic moat, limited downside and substantial upside for investors over the next two years. This write-up is not too "number heavy," but I'm happy to dig into specifics during the Q&A.
Established in 1998 and based near Amsterdam, Interxion operates 32 data centers in 13 metropolitan areas in 11 countries, serving over 1,200 customers. Such coverage gives Interxion a larger pan-European footprint than any of its competitors. With over 400 carriers and ISPs and 18 internet exchanges, Interxion is the connectivity leader in Europe. In Jan. 2011, Interxion IPO’d on the NYSE as a foreign private issuer.
Companies are increasingly seeking to be accessible to their customers on any device at anytime, and the only way to do this is to put everything on a network. This strong underpinning of demand coupled with general supply discipline in the industry indicates Interxion has significant pricing power.
Data center IP traffic is expected to grow at a CAGR of 31% for the next 4 years, as is global consumer internet traffic. I would encourage you to read Cisco's latest report for more info about data center demand going forward: http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns1175/Cloud_Index_White_Paper.pdf
As a result of the above trends, the growth in internet traffic, cloud computing, and the use of customer-facing hosted applications are significantly increasing demand for data center services. For most companies, the cost of funding such complex solutions in-house can be prohibitive, and these companies will continue to outsource the CAPEX and inconvenience of running a data center in-house. Finally, the lack of available substitutes and the presence of high switching costs leave European data center customers with little bargaining power.
Pricing and competitive dynamics are rational, the supply pipeline is struggling to keep up with demand, and despite continued macroeconomic headwinds in Europe, the data center industry continues to experience rapid growth.
Strong Operating Model:
Interxion operates data centers in Europe’s major metropolitan areas (London, Paris, Frankfurt, Madrid, Amsterdam), and its data centers are primarily city center-based, close to power sub-stations, and near the intersection of telecommunications fiber routes. These locations, just outside city centers, enable Interxion to avoid more stringent environmental regulations and simultaneously allow customers to benefit from the close proximity to content delivery network providers and internet exchanges, which in turn enables them to rapidly deliver content to consumers.
In addition, Interxion’s exposure to those European countries facing the most severe economic challenges is limited:
Equippable Space Geographical Breakdown
As of Dec 31, 2011
Sqm % of Total
France 13,200 19%
Germany 11,200 16%
Netherlands 9,700 14%
UK 5,200 8%
Subtotal 39,300 58%
Rest of Europe
Switzerland 6,400 9%
Belgium 4,800 7%
Austria 4,700 7%
Spain 4,000 6%
Denmark 3,500 5%
Ireland 3,500 5%
Sweden 1,900 3%
Spain and Ireland comprise only 11% of Interxion’s total equippable space.
Interxion enjoys a number of competitive advantages that create a wide economic moat for the company.
David Ruberg, Interxion’s CEO and a former partner at Baker Capital, left his role at Baker to take the reins at Interxion in 2008. Mr. Ruberg is the former CEO of a broadband communications services provider and has a Master’s degree in Computer and Communications Sciences. His deep knowledge of the IT, technology and communications sectors has played a large role in his ability to attract and serve customers during his tenure.
Management currently has no intention (or need) to issue more equity, so shareholders need not fear any dilution.
Valuation: Please note that Interxion reports its financials in Euros but I have converted them to USD, based on today's exchange rate.
The below table provides an overview of the multiples paid in recent data center acquisitions:
Acquiror Target Date Closed Deal Value ($mm) EV/Revenue EV/EBITDA
Century Link Savvis July '11 3,200 3.2x 11.0x
Time Warner Cable NaviSite April '11 251 1.9x 11.6x
Verizon Terremark April '11 1,902 5.4x 24.7x
Windstream Hosted Solutions Dec '10 310 5.0x 10.0x
Cincinnati Bell CyrusOne June '10 525 7.2x 12.5x
Equinix Switch & Data May '10 683 3.0x 9.3x
Mean 4.3x 13.2x
Median 4.1x 11.3x
Applying to Interxion the average EV/EBITDA multiple (13.2x) paid in recent transactions implies a total enterprise value of $1.87bn. Subtracting debt and adding back current cash and cash equivalents implies a market capitalization of $1.7bn, or $25.45 per share (representing a ~20% increase from today's price).
However, many of the above data centers lack some of the characteristics that give Interxion its competitive strengths, such as the strategic locations of its data centers and the network effects it offers its customers by virtue of the depth of its connectivity. As a result, Interxion should fetch a premium in any acquisition.
A look at Interxion’s closest comps, Equinix and Telecity, also supports that idea that Interxion is undervalued. Currently trading at 11.4x LTM EBITDA, Interxion is 2 turns below Equinix and almost five turns below Telecity. Applying a conservative multiple of 13.5x implies a total enterprise value of $1.91bn, or $26.08 per share.
Closest Comps Market Cap EV/EBITDA P/E
Equinix 9,500 13.5x 86.7x
Telecity 1,700 16.2x 36.2x
Interxion 1,460 11.4x 33.1x
Interxion is a firm with REIT characteristics but with fundamental growth drivers that are far more powerful than those associated with traditional real estate investments. As Interxion’s growth rate eventually declines, it will begin to throw off significant cash and could convert to a REIT. Regardless of whether it does so, the nature of its business model is likely to cause it to trade as a REIT, based on REIT metrics. The recent conversion of many data centers to REITs will help speed this along. When we compare INXN to its comps using REIT multiples, things look even better. Interxion is 5 and 6 turns below Telecity and Equinix, respectively:
Closest Comps Mkt Cap P/AFFO
Equinix 9,500 20.4x
Telecity 1,700 19.1x
Interxion 1,460 14.3x
With a current AFFO yield of 7% and a significant amount of new revenue generating space expected to come online in the back half of 2013, I expect Interxion’s AFFO yield to pass 10% next year.
Attractive Merger Candidate:
Interxion also presents a great option for other data centers looking to expand into Europe. While Baker Capital would have the capability of vetoing any deal, there is nothing to indicate it would reject an offer that is in the interests of shareholders.
Other Attractive Investment Characteristics:
Mitigant: Management has historically deployed growth CAPEX conservatively and effectively.
4. Increased competition over time as more players enter the European market.
Mitigant: Significant barriers to entry make this unlikely to pose a threat to Interxion.
5. Technological advancements in server technology could obviate the need for data centers.
Mitigant: The need for data centers is driven by a profound, long-term shift toward the Internet and digital busines models, and this is not likely to change.
Mitigant: Interxion’s historically stable utilization rates have kept provisions for onerous lease contracts at low levels.
An investment in Interxion gives investors a piece of a company with a wide economic moat in an industry with secular growth tailwinds, all for a price below industry average multiples. The downside is minimal, and as data centers begin to trade on REIT multiples, substantial upside will be realized. I realize there is no hard, near-term catalyst here, and that Interxion, while undervalued, is not outrageously cheap. But it is a great business that is easy to understand, has durable competitive advantages, a competent management team, and enjoys powerful secular tailwinds. It is not easy to find a business displaying all these characteristics simultaneously.
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