Chinese rival GDS and U.S. peer EdgeConneX are reportedly considering bids for the smallest of China’s three independent data center operators
- Data center operators GDS and EdgeConneX have reportedly expressed interest in making bids for Chindata
- Chindata’s control by U.S. private equity giant Bain and the recent departure of its founder may make it ripe for such a buyout
By Doug Young
After a turbulent year that saw their stocks lose more than half their value, China’s small field of independent data center operators has suddenly become a hotbed of M&A activity. Just weeks after VNET (VNET.US) received an unsolicited buyout offer, its smaller but more highly valued peer Chindata Group Holdings Ltd. (CD.US) is also reportedly fielding interest in a buyout from at least three potential suitors, Bloomberg reported on Friday.
Of the potential buyers, the most promising is GDS (GDS.US; 9698.HK), which together with VNET and Chindata are China’s three major independent data center operators. A combination of GDS and Chindata would create a clear industry leader that could emerge as a consolidator for other independent data center operators in China and potentially even challenge big names like Alibaba (BABA.US) and China Telecom (0728.HK; 601728.SH).
Asian PE firm PAG has also shown interest in Chindata, and U.S.-based data center operator EdgeConneX could also be interested, according to the Bloomberg report, citing unnamed sources. The report noted that Chindata was never formally put up for sale, even though these three potential bids show that buyers sense the company could be ripe for a purchase.
So, why are we suddenly seeing this interest in data center operators when there’s been very little other M&A activity in China’s other high-tech sectors lately? The answer probably owes to a couple of industry-specific factors. And in Chindata’s case, a few company specific factors are also driving this potential sale.
First the industry factors. U.S.-listed shares of all three Chinese data center operators have taken a bath over the last year, losing nearly two-thirds of their value or even more in VNET’s case. The stocks got caught up in a bigger selloff for all U.S.-listed China shares, largely due to concerns about regulatory crackdowns by Beijing in a wide range of sectors, from education to e-commerce.
But data centers were not among the sectors targeted for a crackdown. To the contrary, the group is actually on a list of sectors targeted for strong government support under China’s latest Five-Year Plan that emphasizes business digitization. Part of that plan will see the country develop eight computing hubs and 10 data center clusters as part of an Eastern Data, Western Computing plan first announced in 2020.
So that means many may see the sector as quite undervalued and at relatively low regulatory risk, which is likely what’s driving this sudden new wave of M&A activity.
Then there are the company-specific factors, led by the fact that Chindata is just now emerging from a turbulent few months after the sudden departure of founder Ju Jing in December. That unexpected turn sparked a share selloff over concerns about the company’s future direction, and Chindata only just unveiled its new management team last month. Thus, the company is in a transitional phase right now, which would be good timing for this kind of ownership change.
The other factor specific to Chindata is its overwhelming control by a single shareholder, Bain Capital. Chindata was formed in 2019 through a merger that involved one of Bain’s portfolio companies. Following that, the U.S. private equity giant held 47% of Chindata’s shares and a whopping 81% of its voting rights when Chindata filed its last annual report about a year ago.
Bain’s voting power has probably grown even bigger since then, after founder Ju Jing’s voting rights were sharply reduced under an agreement he later reached subsequent to his departure in December. Ju previously held 13.3% of the company’s voting rights, but that has probably been cut to around 5% or less under his post-departure agreement.
So, the bottom line is that Bain currently calls all the shots at Chindata, at least when it comes to this kind of M&A decision. Bain may be open to such a sale to exit the investment completely, or simply want to get a big stake in a merged company that could become the clear leader in an area being strongly supported by Beijing.
A combination with GDS would create a data center operator with more than 10 billion yuan ($1.5 billion) in sales last year and a combined market value of more than $7 billion. The company would be squarely focused on China, but would also have a strong Asia presence with existing or under-construction facilities in India, Indonesia and Malaysia.
An EdgeConneX combination also looks potentially interesting, though could be more controversial. That’s because of EdgeConneX’s U.S. roots, though it also has relatively major presences in Europe and India, and small presences in South America and China. China actually bans foreign ownership of data centers, so it’s a bit unclear if a purchase by EdgeConneX would even get Chinese regulatory approval. And with data being such a sensitive subject these days, it’s quite likely that the U.S. might also resist such a combination.
EdgeConneX itself was purchased by Swedish private equity company EQT AB in late 2020 in a deal reportedly worth about $2.5 billion. That means its combination with Chindata would create a company worth more than $4 billion.
Not surprisingly, investors were quite excited about the potential for a Chindata buyout. The stock rose nearly 10% in Friday trade, though it is still down about 24% so far this year, and has lost about two-thirds of its value over the last 52 weeks.
In valuation terms, Chindata was previously the strongest among the three Chinese players last year. But it has slipped to second behind GDS, even though it’s the only profitable company of the three. It currently trades at a price-to-book (P/B) ratio of 1.2, versus 1.8 for GDS. Those compare with a lowly P/B of 0.8 for VNET, whose shares initially surged after announcing its unsolicited buyout offer early this month but later gave back all those gains.
At the end of the day, Chindata does look quite ripe for the picking by a larger peer due to its recent management overhaul and relatively small size. Of the potential suitors, GDS appears the most likely to succeed due to the greater likelihood of a regulatory veto for an EdgeConneX deal.
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