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Feature 20 June 2023 (Computer Weekly)

Although hedge fund manager Jim Chanos just a year ago predicted datacentres could be the next "Big Short", the UK sector including colocation is still growing amid ongoing merger and acquisition (M&A) activity.

“Equinix, Digital Realty, NTT, Telehouse - they all have gone through some sort of merger, acquisition, jointventure or partnership in recent years,” says Sina Joneidy, senior lecturer in digital enterprise at TeessideUniversity.

To an extent, that is still happening , but the reasons do vary. And if a fair amount of industry consolidationhas already happened, will there be more?

“It depends,” Joneidy says. The last two years, including the cost of living and energy price crises,challenged datacentre prospects. Yet data consumption continues to grow - customers' need has not changed, he says.

“It's always been an issue of reliability, scalability, security and cost effectiveness, and datacentres provideon these aspects,” Joneidy says.

Anthony Milovantsev, partner, cloud and digital infrastructure business, at strategy consultants AltmanSolon, broadly agrees, pointing to due diligence and strategy work he has been involved with on some 67 datacentre deals since 2014.

“There has always been consolidation in the datacentre space. Look at the big publicly listed players - they all grew from acquisitions,” Milovantsev says.

Third wave

From the early 2000s until around 2013-2014, datacentre operators expanded in the publicly listed real estateinvestment trust (REIT) market; Equinix's acquisition of Telecity closed in 2016.

Then there was a second wave of deals and consolidation across Europe.

In 2023, the region looks to be at the tail end of a third wave, consolidating operators beyond the listed players, with a “separate set of deals” with US hyperscalers ongoing.

“It's probably going to slow down in terms of numbers of deals in the UK, as there are fewer players now,” Milovantsev says.

But deal value in financial terms may still be high enough to generate investor interest, even as the numbersof deals on offer shift to emerging areas from southern Europe to the Balkans or central eastern Europe, he adds.

Local champions will continue to get acquired in territories where some of the big players do not yet exist. One exception might be carve-outs from telecoms giants that simply “don't do” datacentres per se.

“Liberty Global did this already with an entity called AtlasEdge. That's actually a carve-out from VirginMedia,” he says. “Kind of a parallel stream of consolidation that will continue in a slightly different form.”

However, investors will expect different growth rates in the likes of Egypt, South Africa or Malaysia versusthe UK, Canada or France, where businesses have largely migrated their data off-premise.

“Investors theoretically pay for future potential. And that mix has changed in the UK relative to brand-newterritories – one thing we do with investors is take a step back and ask about the local ecosystem and countrybefore we start to look at the [individual prospect] company,”

Milovantsev says. “What path is the country on? Is the roof for growth another 10 years?”

That said, Brexit has not so far mattered much from a US investor perspective because the UK is stillprotecting data via GDPR. Also, colocation demand has proven more resilient than many predicted.

As hyperscale valuations have climbed, some investors have been out-competed in auctions - and they'reseeking attractive alternatives. Investors increasingly understand that

colocation is not just a stop along theroad to Amazon or similar; the sector continues to grow, including UK regional deployments.

“Five years ago when hyperscalers started coming in, investors kind of stopped looking at retail colocation. It's smaller relative to the hyperscale world,” Milovantsev says. “Now, there’s renewed interest. Everythingis actually going up except


Customers continue to come back, and new customers are coming online. While there may not be 20%-30%growth per year it's still in “high single digits, low double digits” that can underpin success, he says.

Sustainability and climate compliance

A key challenge for independent datacentres on sustainability and climate compliance is that most are privately funded. When it comes to synergies from use of waste heat, for instance, a single campus - “even decently sized” -can only heat several thousand homes, Milovantsev points out.

Simply connecting up and contributing via a national or regional grid may not be sufficient – so furtherindustry consolidation may help achieve needed economies of scale, he says.

Rick Smith, founder at consultancy and advisory firm Forbes Burton, confirms that economics of datacentreshave been affected by the last several years of supply and cost stresses.

However, he says there's also been a general effect in that timeframe from business proprietors looking tostand down for work-life balance reasons. That has stimulated a certain amount of consolidation activityacross the business and customer environment. ...


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