Verizon (VZ) to Divest 29 Data Centers to Equinix for $3.6B

Shares of U.S. telecom behemoth Verizon Communications Inc. VZ has had a moderate run on the bourses over the past one year. Year to date, Verizon has gained 8.96% but has failed to beat the Zacks categorized U.S. wireless national industry's growth of 14.78%.

However, we believe that Verizon’s diversified business model covering different fields like communications, technology, wireless industry, Internet of Things (IoT) and the media video and digital platform has been the primary reason for the company’s Zacks Rank #3 (Hold).

Toward this end, the telco recently finalized its deal with Eqinix Inc. EQIX, to divest its data center business to the latter. As per the deal, Verizon has decided to sell 24 data center sites in the U.S. and Latin America to Equinix for $3.6 billion, in an all-cash transaction. The Verizon-Equinix deal is expected to close by mid-2017, subject to regulatory approvals.

Equinix’s Profit

Equinix is a global interconnection and data center company and also a major colocation facility provider. The company provides space, power and cooling facilities to customers. Growing implementation of cloud computing technology has increased demand for data center space. Amazon Web Services, the cloud computing business of Amazon.com Inc. AMZN and Microsoft Corp. MSFT are major clients of Equinix.

The recent deal will expand Equinix's global reach by boosting its operations in the U.S. and Latin America and help it foray into new markets like Bogotá, Culpeper and Houston. The acquired portfolio includes 900 customers and an area of 2.4 million square feet. Equinix's global presence will now scale to 175 data centers across 43 markets which include 17 million square feet of area in the Americas, Europe and Asia-Pacific.  The deal will also expand Equinix’s capacity in the existing markets of Atlanta, Denver, Miami, New York, São Paulo, Seattle and Silicon Valley.

Coming to price performance, Equinix has gained 8.96% year to date, outperforming with the Zacks categorized Reit-Eqty Trust Retail Market’s decline of 1.62%.

The outperformance can be attributed to the impressive earnings performance of the company in the last reported third quarter of 2016 wherein both adjusted funds from operations (AFFO) and revenues improved significantly from the year-ago quarter. We believe this is also the primary reason for Equinix’s Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Winding Up

This deal allows us a glimpse of the present U.S. market trend where operators are exiting the data centre business in order to focus on managed services. Verizon’s acquisitions over the past one year, including that of AOL, Yahoo Inc. YHOO, LQD WiFi LLC, Fleetmatics Group, Teleogis Inc. and XO Communications, further highlights the trend.

However, the divestiture does not affect Verizon’s managed hosting and cloud platform or its data center services across 27 sites in Europe, Asia-Pacific and Canada.

Meanwhile, the data center buyout will help Equinix meet the diversified needs of customers from traditional businesses to digital businesses.  Further, customers will be able to operate on an expanded global platform where they can process, store and distribute larger volumes of data.

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