Activists descend on Internap, pressure sale amid data-center consolidation
Mergers and acquisitions are remaking the sector and activists insist that the company join in. A legion of potential suitors would be interested, including Equinix, CyrusOne and QTS.
Internap Corp. (INAP) -- a data-center operator with high-profile clients including Lions Gate Entertainment and visual effects studio Scanline -- is expected to be acquired as part of a wave of consolidation facing the sector. The only question is when.
If a pack of activists descending on the Atlanta, Ga.-based company get their way the answer is likely sooner than later.
Ex-Carl Icahn lieutenant Russell Glass and his RDG Capital Fund Management launched a public campaign at Internap with an April letter suggesting that its private value in a sale would be $16 to $19 a share -- much higher than the company's recent trading price of $9.24. Glass pegs the total value of a sale at $1.4 billion including debt.
The activist escalated his insurgency in June when he posed a series of pointed M&A-focused questions to Internap CEO Michael Ruffolo at an occasionally contentious Harvard Club of New York investor meeting. "We've talked to a number of M&A bankers in the data center and M&A market who clearly indicated that if the company were for sale that there would be multiple suitors likely interested," Glass said. "If a number of significant shareholders requested the board to conduct a process, whether it would be public or private, would that be something the board would be responsive to the will of shareholders?"
Ruffolo responded, defensively, saying he is interested in "anything our shareholders have to say" and "depending on what they are saying and how many believe in that obviously we are going to listen quite seriously."
Glass suggest that the insurgents may expand their campaign in the coming months. An activist could also launch a proxy contest next year in an attempt to drive a sale process. In the short term, Glass may find himself on the board as soon next month. People familiar with Internap said the company's nomination and governance subcommittee will discuss whether to add him on as a director when the panel meets in August.
Another major activist in smaller capitalization stocks, Discovery Group, reported owning a 5.3% stake in a June 24 filing and noted that it may hold discussions with management and directors. Discovery has more experience with proxy contests than RDG, having conducted four in recent years according to FactSet.
And Mario Gabelli, one of the most prolific employer of proxy contests in the U.S., owns an 18.5% stake through his funds and has been an activist 13D filer for several years. He first reported accumulating a 6% stake in May 2011 at prices ranging from $6.47 to $8.21 a share. While Gabelli hasn't spoken out about RDG Capital's campaign he could launch a proxy contest or back one if Internap doesn't put itself on the auction block. One person familiar with Gabelli said he believed the activist fund sees Internap's net asset value in the mid-teens and that the fund manager would back a sale.
The crucial issue driving the activists is the fact that Internap is using only 54% of the capacity at its 16 company-owned data centers, significantly below the industry average. A larger strategic acquirer, they contend, would employ that capacity more quickly than Internap could on its own.
At least four deals have been struck in the data center space in the past few months, leaving a number of losing bidders still hoping to expand their facilities through acquisitions, according to people familiar with the situation. This interest suggests that buyers are looking and may already have made bids. "If there were a dozen other bidders for those companies and only one winner then there were 10 or 11 other bidders who expressed interest in acquiring a data center company but were not successful," said one person familiar with Glass' thinking.
Frederic Moran, director of research at Burke & Quick Partners LLC, said Internap is likely to sell itself within the next few years. He counts least nine companies as potential buyers. "Internap is the most likely acquisition target of the data center companies," he said. "It is a small player relative to the data center space and the only one that is a sub-$1 billion market capitalization, where all these companies are multi-billion dollar players that at times are growing through acquisitions."
Moran said he sees a $12 target price for Internap, adding that a strategic buyer could pay a "mid-teens" price. Another analyst suggested that Internap's specialty -- high-speed data-center services for high-performance clients -- is attractive to larger rivals.
And data-center consolidation has been rampant of late. CyrusOne Inc. (CONE) agreed to pay roughly $400 million for Cervalis Holdings LLC in April. In May QTS Realty Trust (QTS) struck a deal to buy PE-backed Carpathia Hosting Inc. for $326 million while Equinix Inc. (EQIX) unveiled a $3.6 billion offer for TelecityGroup plc.
Beyond Equinix, CyrusOne and QTS, Moran sees six other potential buyers: CoreSite (COR), DuPont Fabros Technology Inc. (DFT), Digital Realty (DLR), Centurylink Inc. (CTL), Zayo Group Holdings Inc. (ZAYO) and Windstream Holdings (WIN).
Nonetheless, Ruffolo apparently is in no hurry to sell and is focusing on ramping up revenue. At the Harvard Club, Ruffolo said Internap has "Tier 1 investment banks" speaking to the company every quarter. It is unclear whether the company has hired a financial adviser. An Internap spokesman declined to comment.
The activists are likely to become more aggressive if Ruffolo resists a sale. The deadline to nominate director candidates is Feb. 29. Internap's bylaws prohibit a change-of-control director election -- meaning that an activist could elect only a minority slate of deal-friendly directors. But Ruffolo's seat is up next year and removing the CEO from the board would send a strong message that investors want a deal. With roughly a quarter of shares outstanding in the hands of activist funds, they may just get one.
