UPDATED 10:05 EST / AUGUST 26 2016

NEWS

Rackspace going private in $4.3B deal

Cloud infrastructure provider Rackspace Hosting Inc. is going private in a $4.3 billion deal announced this morning. The deal comes after three weeks of speculation that the hosting provider would seek an alternative to the public markets as its early lead in cloud services was eclipsed by giants like Amazon Web Services and Microsoft.

The company will be bought out for $32 per share by Apollo Global Management, LLC, a private equity fund founded by former Drexel Burnham Lambert banker Leon Black that is now one of the world’s largest private equity forms. It has $186 billion under management and describes itself as having “significant distressed expertise.”Investment firm Searchlight Capital will also make an unspecified “strategic equity investment” in Rackspace, the company said.

The value of the deal is only six percent above yesterday’s closing price, but a 38 percent premium compared to Rackspace’s closing price on Aug. 3, which was the last day before reports of a buyout began circulating. Rackspace reported a disappointing growth outlook on Aug. 8.  The company has made no secret of its hopes of finding a buyer, but has said it couldn’t get the valuation it thought was appropriate. Rackspace stock has risen sharply this month since the reports surfaced.

Among the other properties Apollo owns are jewelry retailer Claire’s Stores Inc., casino operator Caesars Entertainment Corp. and cruise operator Norwegian Cruise Line Holdings Ltd. Additional funding for the deal is being provided by Citigroup Inc., Deutsche Bank AG, Barclays PLC and Royal Bank of Canada, among others.

The transaction “will deliver immediate, significant and certain cash value to our stockholders,” said Graham Weston, co-founder and chairman of Rackspace, in a prepared statement. The deal will also “provide Rackspace with more flexibility to manage the business for long- term growth and enhance our product offerings.”

Rackspace was an early leader in cloud computing but has more recently pivoted to position itself as an advisor and support service for other leading cloud platforms. the company is notable for having co-developed OpenStack, the open-source platform that is widely used by many enterprises for private clouds.

Private equity funding is an increasingly popular safe haven for tech companies whose share prices are declining or stuck in low gear. Prior to reports of the plans to go private, Rackspace stock traded as low as $22.69, or more than 70 percent below its January, 2013 high. Going private removes companies from the harsh spotlight of the public markets and can be the first stage in a turnaround strategy that leads to a successful subsequent initial public offering. However, the need to service debt and pay dividends to shareholders can also undermine a company’s ability to make needed long-term investments.

 

 


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