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Is the UK datacentre industry set for further consolidation?

June 20, 2023
in Technology
Is the UK datacentre industry set for further consolidation?
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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, joint venture or partnership in recent years,” says Sina Joneidy, senior lecturer in digital enterprise at Teesside University.

To an extent, that is still happening, but the reasons do vary. And if a fair amount of industry consolidation has 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 provide on these aspects,” Joneidy says.

Anthony Milovantsev, partner, cloud and digital infrastructure business, at strategy consultants Altman Solon, 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 estate investment 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 numbers of deals on offer shift to emerging areas from southern Europe to the Balkans or central eastern Europe, he adds.

Investors theoretically pay for future potential. And that mix has changed in the UK relative to brand-new territories

Anthony Milovantsev, Altman Solon

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 Virgin Media,” 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 versus the 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-new territories – one thing we do with investors is take a step back and ask about the local ecosystem and country before 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 still protecting 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’re seeking attractive alternatives. Investors increasingly understand that colocation is not just a stop along the road 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. Everything is actually going up except on-premise.”

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 further industry consolidation may help achieve needed economies of scale, he says.

Rick Smith, founder at consultancy and advisory firm Forbes Burton, confirms that economics of datacentres have 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 to stand down for work-life balance reasons. That has stimulated a certain amount of consolidation activity across the business and customer environment.

Forbes Burton is often called in on rescue or recovery type projects.

“We can get called in on anything really. Normally, something has come across their desk they’re uncomfortable in dealing with and they need help, because it’s not what they’re good at doing,” he says. “Brokers in the M&A world have been very busy over that period post-Covid.”

Smith says while business consolidation did since then stagnate somewhat, it has certainly started to rise again. People often cannot run their businesses the same way they used to, encouraging businesses to be sold off.

The overall business environment has changed. For example, logistics has become a larger challenge in terms of goods and even services, opening up merger opportunities for greater economies of scale, including cost control – whether national or international.

“In the insolvency world, we’ve seen big growth based on all that,” he adds. “People can feel somewhat uncomfortable and don’t have that certainty in their business. There’s more of a lean towards becoming part of a larger organisation to ride more turbulent times.”

Playing catch-up

Sarah Williamson, partner and head of commercial and technology at law firm Boyes Turner, broadly agrees with much of what has been said already. The final cost situation for tech providers remains unclear despite continued, even rising, demand, especially for off-premise and cloud.

“If you get consolidation, and you’re really down to a few huge players, you can see prices rise.  Conversely, because they could benefit from economies of scale, and they all compete against each other, that can drive prices down,” says Williamson.

“Certainly from my clients’ perspective, cost is key. Having that flexibility with regards to cost as well and not being tied in long term is the key driver for their businesses.”

She agrees that some consolidation will likely be driven by the need for sustainability as customers increase their focus on energy and climate-friendly approaches. At enterprise level, many are already working on this, but there’s not yet so much trickle down to smaller customers, Williamson notes.

Even post-pandemic, some organisations are still playing catch-up on supply shortages and need to look further ahead. Projects have been derailed and delayed.

Although many organisations continue to factor in supply chain challenges, for instance, as a “new normal” – virtually business as usual – it still makes for more complexity when planning weeks, months and years ahead.

“The biggest question is scalability, and then also security. Some SMEs just cannot afford the level of security that’s now required,” Williamson suggests, adding that for simplicity that may drive more businesses to go to the big public cloud providers.

Forbes Burton’s Smith says datacentres planning their next move in such times could ensure they’re spending time working “on” the fundamentals – rather than “in” the business, as it were. That means looking through a business rather than technical lens, getting to know and understand the financial, sales and marketing, and human resources better.

“If it’s not what you do, get help to put it in place, presented in such a way that you do understand it,” Smith says. “And look at the data. We find that not everyone has done their data correctly.”

>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : Computer Weekly – https://www.computerweekly.com/feature/Is-the-UK-datacentre-industry-set-for-further-consolidation

Tags: datacentreIndustrytechnology
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