Wipro taps into growing trend by selling data centres

The Indian software services firm’s sale comes at a time when demand for data storage is booming and competition from cloud providers is mounting.

Wipro’s $405 million sale of its ailing hosted data centres business to Chicago-headquartered IT services firm Ensono is a neat way of unlocking value at a time when the demand for data storage is booming.

The Indian group said in a statement on Wednesday that it is selling eight data centres and its hosted data centre services business, with over 900 employees, to Ensono, a portfolio company run by private equity firms Charlesbank Capital Partners and M/C Partners.

It's part of a creeping trend as some telecoms and technology firms look to offload their data centres in order to slim down and focus on their core businesses. In Australia and New Zealand, for example, Vocus has said it is looking to sell off its data centres by the end of this financial year. 

Other private equity firms are also pouncing on this trend. Last year Warburg Pincus backed a fund set up by former Tata Communications executive Rangu Salgame to buy data centres and other fast-growing digital media services from telcos. 

Telecoms and IT firms are selling into burgeoning demand for data storage as the widespread adoption of cloud computing, the Internet of Things, smart cities, and big data analytics all generate a dazzling explosion of data.

Wipro is extracting a price of 26 times earnings for its data centre business from Ensono, despite the disruption the business is facing as customers migrate to cloud providers, according to stock analysts. US cloud providers such as Amazon Web Services are expanding rapidly around the world.

A person familiar with the matter said that most of Wipro’s data centres are located in the US, the largest market for data storage in the world. Some are also in Europe according to stock analysts following Wipro.

According to 451 Research, the United States comprises about 28% of the global insourced and outsourced data centre market (by net operational square feet), with the market expected to grow at a compound annual growth rate of 3.1% between 2015 and 2020.

Many of Asia’s largest institutional investors have been targeting US data centres of late.

Singaporean sovereign wealth fund GIC said in February it would back an $800 million investment vehicle to buy data centres across North America. Another Singaporean state fund Temasek owns Singaporean property developer Mapletree, which said in October that it would buy a portfolio of 14 US data centres for $750 million.  

ASIA PREMIUM

However, this strategy seems to leave money on the table since data centres in the largest cities across the Asia-Pacific region command rents that are 20% to 40% higher than in the US, according to property adviser CBRE. It's partly why some US technology giants are targeting the Asian market for data storage growth

There are also rising risks for investors, such as increasing competition.

“As more players come into the space, including [real estate investment trusts], valuations will be impacted and there is the potential for lower returns,” said Steve Gruber, a managing director on the real assets team at private markets advisory firm Hamilton Lane. But that's a longer-term concern, he added, given the current strong and growing demand for data storage and network capacity.

As part of the sale agreement with Ensono, Wipro will invest $55 million in the offloaded business, keeping a smaller stake in the fast-growing data centre sector.

The hosted data centre services business is one of three businesses that joined up with Wipro when it acquired Infocrossing in 2007 for $600 million on a price to earnings ratio of about 43 times.

Jefferies acted as an exclusive financial advisor to Ensono for this transaction, while Credit Suisse acted as sole financial advisor to Wipro. Goodwin Procter and Ropes & Gray acted as legal advisors to Ensono, and Hughes Hubbard and Reed, and DLA Piper were legal advisors to Wipro on this transaction. 

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