As Verizon Communications ( (VZ - Get Report) ) announced that it would sell its data center business to Equinix ( (EQIX - Get Report) ) for $3.6 billion on Tuesday, Chairman and CEO Lowell McAdam described the deal as a necessary pruning of its portfolio as the telecom emphasizes mobile content, advertising technology and the Internet of things.
"You trim the branches on the tree so the tree can be as strong as possible," McAdam said at the UBS telecom, media and technology conference in New York on Tuesday.
McAdam likened the sale of 29 data centers to the $10.54 billion sale of landline telecom operations in California, Florida and Texas to Frontier Communications ( (FTR - Get Report) ) earlier this year. Verizon has invested in digital content and advertising with the $4.4 billion purchase of AOL Inc. and the pending $4.8 billion purchase of Yahoo! ( (YHOO) ). The New York telecom has also invested in telematics, or technology that tracks vehicles, with the the $2.4 billion acquisition Fleetmatics Group ( (FLTX) ) and the purchase of Teleogis Inc., both announced this summer.
"We'll look for opportunities [to sell assets] where we are subscale and put the money into an area where we think we can scale because in our business cost, your cost structure is absolutely critical to long-term success," McAdam said.
The Deal reported in early December 2015 that Verizon had received interest for its data centers and that the sale process was imminent. The auction played out this year, alongside a data center auction by CenturyLink ( (CTL - Get Report) ) that concluded with the $2.3 billion sale to a group led by BC Partners Ltd. and Medina Capital Advisors.Equinix is paying 13 times Ebitda, according to UBS, which is higher than 12 times Ebitda that CenturyLink recieved. However, it is less than the 14.9 times that Verizon paid in its $1.9 billion purchase Terramark Worldwide, which accounted for a large chunk of the telecom's data center portfolio.
Equinix CEO Stephen Smith told investors during an call that the company would establish a presence in Bogota, Colombia; Culpeper, Va.; and Houston. The deal also strengthens Equinix's portfolio in Atlanta, Denver, New York, Seattle and Silicon Valley.
The four data centers inCulpepper, Va. will help Equinix sell to government agencies.
Houston has long been on the buyer's wish list, the company's Americas President Karl Strohmeyer said. "Not only is it a very large enterprise-headquartered market for us, but, of course, it has the oil and gas sector which is a sector that we've seen nice traction with, without having the facility in the market," Strohmeyer said. "And we think having a campus there will be a significant advantage for that particular sector and the opportunity for growth there."
Verizon and Equinix plan to close the deal in mid-2017.