Digital Realty Buys Majority Stake in African Colocation Provider Teraco

Global data center operator and colocation provider, Digital Realty, has acquired a 55 percent stake in Teraco from a consortium of investors, including Berkshire Partners and Permira. The transaction would value the African colocation provider at approximately $3.5 billion.

After Equinix announced its expansion into Africa with the acquisition of data center operator MainOne for $320 million last month, Digital Realty has now also solidified and expanded its position on the African continent. Digital Realty already had two colocation data centers available in Kenis, in Nairobi and Mombasa respectively. Through the acquisition of this majority stake in Teraco, Digital Realty will be granted access to seven state-of-the-art facilities strategically located in the key South African metros of Johannesburg, Cape Town and Durban.

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Teraco has about 600 customers, including over 275 connection providers, 25 cloud and content platforms, and almost 300 businesses. Teraco supports over 22,000 interconnections between clients. Its Isando campus in Johannesburg, with over 13,000 cross-connects, would be one of the world’s most densely networked places. Teraco also has seven on-ramps in Johannesburg and Cape Town to prominent worldwide cloud service providers (CSPs), as well as direct access to seven subsea cables in Durban on the east coast and Cape Town on the southwest coast.

“This highly strategic transaction immediately cements Digital Realty as the leading colocation and interconnection provider in Africa, a region experiencing rapid digital transformation,” said A. William Stein, Chief Executive Officer (CEO) at Digital Realty. “Teraco is the industry leader in South Africa and the continent’s connectivity hub. This investment will enhance our ability to serve customers on a global basis by adding significant regional scale with a premier, network-dense portfolio in South Africa’s most strategically important metros. Teraco will also advance our strategy of increasing exposure to highly connected, network- and carrier-dense facilities to enhance our global coverage and connectivity capabilities.”

The transaction, which is subject to customary South African regulatory approvals, is expected to close in the first half of 2022.

After the transaction closes, Digital Realty will own approximately 55 percent of Teraco’s total equity interests, while a group of existing investors, including management, Berkshire Partners, Permira, van Rooyen Group, Columbia Capital, Stepstone Ventures, and the Teraco Connect Trust, will own the remaining 45 percent. Between 3.5 and 5.5 years after completion, Teraco’s rolling equity investors will be able to transfer their interests to Digital Realty, while Digital Realty will have the ability to call their equity interests between 5.5 and 6.5 years after closing.

Market Position in South Africa

The combination of Teraco’s strong position in South Africa with Digital Realty’s connectivity hubs in Nigeria on the west coast and Kenya on the east coast – as well as Digital Realty’s strategic Mediterranean interconnection hubs in Marseille and Athens – is expected to significantly strengthen Digital Realty’s pan-African position. It would enhance the company’s ability to serve both local and multinational enterprises and service providers.

The Teraco management team will remain in place and will be in charge of operations in South Africa on a day-to-day basis. Teraco’s management team is managed by Chief Executive Officer (CEO) Jan Hnizdo, a longstanding Teraco employee who has been instrumental in the company’s rapid expansion over the previous decade. Mr. Hnizdo is backed by a local management team with over 100 years of combined expertise.

Furthermore, a significant portion of Teraco’s existing investors, including several leading global digital infrastructure investors with extensive experience investments in Africa, are rolling forward a significant portion of their equity interests, demonstrating their belief in Teraco’s future growth prospects under the Digital Realty umbrella.

Planned Capacity of 187MW

Teraco has a track record of strong double-digit growth in key financial metrics such as sales, EBITDA, and platform participation. The Teraco platform has a total planned capacity of 187 megawatts, with seven in-service plants totaling 75 megawatts and one development project totaling 19 megawatts now in the works.

Teraco holds the freehold of six of its seven data centers, accounting for approximately 85% of total revenues and including its densely networked Johannesburg site. Teraco also owns property next to its Johannesburg and Cape Town campuses that will allow for the construction of up to 93 megawatts of additional capacity, offering significant underlying growth potential and giving the runway to support customer growth.

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Digital Realty

Subsea Cable Networks, African Data Center Market

Several consortiums of top cloud and content platforms are now developing three more subsea cables, which are slated to arrive within the next three years, in addition to direct access to seven existing subsea cable networks.

The substantial investment in these private networks would underpin Africa’s immense potential for future digital infrastructure expansion, and the leadership change from telco-led consortia to content-controlled partnerships is projected to alter internet connection across the continent, according to Digital Realty. These new and current cable lines surround Africa, providing low-latency connectivity to Europe and Asia from Africa’s east and west coasts.

Over the next several years, Africa’s total addressable data center market is predicted to grow significantly. With a median age of under 20 years, Africa’s population would total about 1.4 billion people, accounting for more than 15% of the world’s total population. The pace of digital transformation is quickening, beginning in South Africa and spreading across the African continent, according to Digital realty. South Africa is the third-largest economy in Africa, and it is home to more than half of the top 500 corporations in the area. Many firms conducting business abroad in Africa have their global or regional headquarters in South Africa.

South Africa is the largest data center market on the continent, although it is estimated that only a fraction of potential demand is being effectively addressed, given the relative scarcity of institutional quality data center capacity, concluded Digital Realty.

“We are excited to enter our next chapter by joining forces with Digital Realty to create a truly global, scaled platform serving our customers in Africa and beyond,” said Jan Hnizdo, Chief Executive Officer (CEO) at Teraco. “Our combined platform will be uniquely positioned to serve the full customer spectrum with the ability to support their growth around the world. We look forward to working with the Digital Realty team to extend our state-of-the-art data center and connectivity solutions to capitalize on the favorable industry trends and tremendous market opportunity.”

Berkshire Partners, Permira, van Rooyen Group

Berkshire Partners and the Permira funds, as well as current investor van Rooyen Group, will each own a minority stake in the company. Teraco’s present management team, led by CEO Jan Hnizdo, will stay in charge of the company and remain key investors.

“It has been a privilege to partner with Jan and his team at Teraco,” said Drew Walker, a Principal at Berkshire Partners. “Teraco has delivered exceptional growth during these first few years of our investment, leveraging its interconnected ecosystems, ongoing investments in expansion capacity, and track record of stellar execution to strengthen its leadership position in the fast-growing Sub-Saharan African data center market. As investors in digital infrastructure businesses for nearly a quarter of a century, we’re thrilled to continue our partnership with Teraco alongside Digital Realty, who will bring significant expertise and resources to the Teraco platform.”

“Over the last seven years, Teraco has transformed itself into one of the most unique data center platforms globally. Today, Teraco combines the very rare characteristics of offering an interconnection-rich ecosystem, being Africa’s home to the Cloud, while also owning the African Internet Exchange, Napafrica. Jan and his team should be very proud of what they have achieved,” said Pierre Pozzo, a Principal at Permira. “It has been a pleasure to support the Company since our original investment in 2015, during which time earnings have multiplied by nearly 20x organically. We look forward to partnering with Digital Realty to further accelerate Sub-Saharan Africa’s digital transformation powered by Teraco.”

Solomon Partners is acting as financial advisor and Latham & Watkins LLP and Bowmans are acting as legal advisors to Digital Realty. Goldman Sachs is acting as financial advisor to Teraco and Weil, Gotshal & Manges LLP and ENSafrica are serving as legal advisors to Teraco.