The activist fund Starboard helps the information middle firm Cyxtera to shut its valuation hole by the SPAC merger

A data center.

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Company: Cyxtera Technologies Inc. (CYXT)

Business: Cyxtera is a leading global provider of colocation and connection services for data centers. The company operates more than 60 data centers around the world and provides services to more than 2,300 leading companies and US federal agencies. It offers data center, colocation, cloud computing, hybrid cloud, cybersecurity and analytics solutions for government, corporate and service providers. It offers Cyxtera Portal, which enables customers to monitor, manage and control their digital infrastructure from a single, dedicated platform; Colocation services; Computer center services; Cyxtera Extensible Data Center Platform, a platform that transforms the design, configuration and delivery of IT infrastructures. The company also offers AppGate SDP, a network security platform to protect any application; and AppGate Insight, which provides cloud and network architects with visibility into all network traffic. In addition, it offers threat analysis, safe surfing, and detection services.

Market value: $ 1.5 billion ($ 9.42 per share)

Activist: Starboard

Percentage ownership: 21.80%

Average cost: $ 6.54

Comment from the activists: Starboard is a very successful activist investor and has extensive experience in operational activism helping boards and management teams run businesses more efficiently and improve margins. This is her 102nd 13D filing. In those 102 submissions, they achieved an average return of 30.25% versus 13.76% for the S&P 500. Their average 13D hold time is 18 months.

What’s wrong?

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

Backstage:

Starboard is a highly skilled and respected activist investor who has created significant shareholder value for himself and other shareholders in its portfolio companies. However, this is not shareholder activism. Cyxtera went public through a merger with a Starboard-backed SPAC, and Starboard now owns 21.8% of the company alone but owns 81.3% as part of a 13D group with other investors under a shareholders’ agreement. That’s not the case that Starboard identifies an undervalued public company and is the catalyst to fill that valuation gap. This is Starboard using its valuation and operational skills to bring what is believed to be a fairly fairly valued private company to public and create shareholder value through growth and efficient operations.

While filing implies that the Starboard sponsor owns the low-priced stocks and the Starboard customers own the high-priced stocks, it doesn’t, and Starboard has actually created a structure that is very convenient for Starboard customers. All economic aspects (including sponsor shares and warrants) go to the Starboard customers and Starboard lets its hedge fund advertise all profits like any other Starboard portfolio investment. As a result, Starboard investors are participating in this investment at an average total cost of $ 6.54 per share, instead of the $ 9.68 per share that Starboard investors paid for their shares and the US $ 1.07 Dollars per share the founders paid for their shares. This fully aligns Starboard’s interest with its investors and more with the company’s other shareholders, who are closer to the SPAC price of $ 10 per share.

Cyxtera was previously owned by CenturyLink (now Lumen Technologies) before being sold to Medina Capital and BC Partners, who joined forces to acquire the assets. Manny Medina and Nelson Fonseca, both from Medina Capital, had shared experiences in this area. Medina built Terremark Worldwide with Fonseca as his second. Terremark Worldwide was eventually acquired by Verizon and the two saw firsthand how big connectivity companies like Verizon and CenturyLink are good at selling network access but are not that focused on optimizing their data centers.

When CenturyLink sold Cyxtera, Medina and Fonseca recognized the opportunity to operate Cyxtera’s data centers in a more focused manner and to offer its customers, among others, connectivity and other services via multiple network operators (not just CenturyLink), value-added solutions for their customers such as Datacenter as a Service or AI as a service solution. Medina and Fonseca have done just that for the past 3.5 years but are now ready to take it to the next level through the merger with Starboard SPAC.

The SPAC structure offers the company many advantages in order to be able to grow faster. First, it has a professional board of directors (including Starboard’s Jeff Smith) with a diverse range of experience to oversee management. Second, as a public, more transparent company, it has much greater credibility to attract large clients who can now do their due diligence faster before signing long-term contracts and have the confidence to deal with a public, government-regulated entity. Ultimately, better and faster access to capital will allow the company to grow faster, be it inorganically or through M&A.

This should help the company fill the huge valuation gap it has with its competitors. It currently trades at an EV / EBITDA multiple of around 15x, while its competitors trade at much higher levels – Equinix at 29.62x, Digital Realty at 30.89x, CyrusOne at 23.77x, and Switch at 29.98x. Additionally, Blackstone recently acquired the peer QTS Realty Trust for a valuation of 27x EBITDA.

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

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