Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

It finally happened: Rackspace is getting acquired. 

After years of seemingly endless takeover speculation and at least one failed strategic review, the cloud-services company announced on Friday that it's selling itself to private equity firm Apollo Global Management for $4.3 billion. Now that the long-envisioned deal has finally been sealed, is it one that shareholders can be happy about?

Apollo is paying $32 a share for Rackspace. That's only about $2 more than where the stock closed on Thursday, but a 38 percent premium to its share price before takeover speculation started heating up (again) at the beginning of the month. It's also about a 30 percent premium to its average price in the year leading up to today's announcement. For what it's worth, $32 a share is exactly the price targeted by Wells Fargo analyst Gray Powell as an appropriate LBO valuation. 

Not Bad
Rackspace isn't selling at the top but the price it's getting from Apollo is probably the best shareholders could have hoped for at this point.
Source: Bloomberg

Rackspace's takeout value is much lower than the mid-$40s price tag that analysts said was reasonable back when the company explored a sale in 2014. Back then, discussions with CenturyLink -- a provider of landline phone service -- faltered because of a disagreement on price, people familiar with the matter said at the time. A few years of diminishing optimism for Rackspace's earnings and sales potential amid competition from cloud-services behemoths like Amazon has since brought the price down. But investors should still be pleased. It's a better price than what Rackspace likely would have been able to achieve on its own anytime soon. 

Cloud Cover
Analysts curbed their estimates for Rackspace's revenue as competition in the cloud-computing sector heated up.
Source: Bloomberg

From Apollo's perspective, it's getting a decent deal as well. Sachin Shah, a merger arbitrage strategist at Albert Fried, notes that Apollo is paying a lower premium relative to Rackspace's unaffected price than it has, on average, put forward for the other buyouts it's undertaken recently.  At about 6 times Rackspace's projected Ebitda for this year, the valuation is on the low end for the industry.

Rackspace checks a lot of the traditional private equity boxes. There's room to add debt to its balance sheet and its free cash flow is strong and steady. Under private ownership, Rackspace will be in a better position to revamp its business. The company is shifting its focus toward helping companies shift their IT operations to competitors' cloud services, as opposed to continuing to duke it out with Amazon and crew. 

This is one persistent takeover story that seems to have found a generally happy ending. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. There have been a plethora -- from home-security services company ADT to Redbox DVD kiosk operator Outerwall -- as Apollo seems bent on winning the award for most active buyout firm.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net