US hyperscale cloud providers such as AWS, Microsoft and Google continue to drive colocation demand across Europe, and the market is also recording record interest from second-tier cloud providers that may be small today, but are growing. Many of these are looking to leverage the ecosystems that are developing around hyperscale public cloud. European providers have also seen an increase in the number of systems integrators and managed service providers using cloud-rich colocation facilities, and are beginning to see an increase in the number of enterprises moving into colocation to gain access to cloud. US wholesale multi-tenant datacenter (MTDC) operator CyrusOne says its existing customer base in the US includes a mix of all of these companies, and that they are seeking a partner to take them into Europe.

CyrusOne, which started out serving financial and oil & gas customers in Texas, and grew to become one of the largest wholesale providers in the country, is planning European expansion on a large scale. The provider says it is hoping to acquire land for greenfield development in parallel with its investigation into joint venture or acquisition opportunities with an established provider for fast market entry.

It has already identified two pockets of land for organic development in Dublin (it closed on the first parcel on July 10), and has clearly stated that it is interested in entry into other Western European markets – namely London, Amsterdam and Frankfurt – where it is investigating inorganic market entry. The provider is no stranger to acquisitions, but to date most of its efforts have been focused on the US Southeast and West Coast regions.

Company: CyrusOne

Subsector: Multi-tenant datacenters

Revenue (TTM): $598m

Net loss (TTM): $26m

Employees: 250

Main products: Wholesale colocation

The 451 Take
CyrusOne already has some space with Digital Realty in London, but this is minimal compared with the scale of development its new plans put forward. It also operates out of Singapore. It is most likely to go head to head with Digital Realty in Europe, and new competition will include e-shelter, Global Switch and retail colocation providers if CyrusOne decides to resume its focus on retail colocation offerings (it has retracted from this in the US in the last few years). CyrusOne could rebuild its connectivity focus with the acquisition of a European retail colocation provider, which could create a new global MTDC giant that sits somewhere between wholesale and retail colocation.

Acquirer profile
CyrusOne is a publicly listed real estate investment trust (REIT) that was founded in 2001. It owns and operates more than 35 carrier-neutral datacenters, with more than four million square feet of technical space in Cincinnati; Northern Virginia; Phoenix; New York Metro; North Carolina (Raleigh-Durham); Quincy, Washington; Chicago; Texas (Dallas, Austin, Houston and San Antonio); Singapore; and the UK. Its customers have largely come from the financial services, cloud, energy, enterprise, managed services, industrial, telecommunications and healthcare sectors. CyrusOne says it serves nine of the 10 largest cloud companies today, and leased 92MW in 2016 alone (642,000 square feet of colocation space). The company recorded revenue of $399.3m in 2015 and $529m in 2016. It issued guidance of $663m-678m for this year.

Over the last year, CyrusOne has been upsizing its credit facilities – most recently (in June) to $2bn from $450m. This places it in good stead to carry out new growth activities, including JV and organic expansion. It is not new to the acquisition process – earlier this year it acquired two datacenters from Sentinel Data Centers in the US. CyrusOne was acquired by Cincinnati Bell in 2010, but then spun off in 2013 (Cincinnati Bell still owns about 9.5% of the provider).

Potential targets
CyrusOne is seeking a number of different acquisition targets. The first is land in Dublin, where it intends to build 'larger' facilities. It already has 60-70 acres earmarked in the city, and has closed on one 15-acre parcel of land owned by South Dublin County Council that is strategically placed at the south of the Grange Castle Business Park (close to Digital Realty's Profile Park datacenter and facilities operated by Microsoft and Interxion). EdgeConnex is also building a datacenter nearby.

CyrusOne plans to invest €21m ($25.3m) in a facility at the park, which offers easy access to the T50 fiber ring that cloud providers and colocation operators connect to in Dublin. This makes the site ideal for the delivery of interconnection services. CyrusOne's plans show that it intends to build in three phases over five years. The provider is also planning an acquisition of another site, which we expect will be positioned to offer redundant services. Dublin could be CyrusOne's first speculative build in Europe.

In its recent earnings, CyrusOne also confirmed that discussions with partners for a joint venture were ongoing. It says it hopes to be able to do inorganic and organic expansion in tandem. The main thing holding discussions back appears to be government requirements – the company says that it needs to ensure that it retains maximum flexibility to make decisions quickly to run its business. CyrusOne says it is unlikely that a full JV will be signed in Europe prior to the close of 2017, but its debt maturities are weighted for six years, which provides it with time to evaluate opportunities.

What are some potential targets for CyrusOne? There are numerous options on the market today. CyrusOne's interconnection product line, which includes high-margin cross-connects and its US Internet Exchange, posted revenue for Q2 2017 of $8.5m. It sees opportunity for growth here, and could seek a provider with interconnection-focused assets (e.g., carrier hotels with established ecosystems of connectivity partners). In Europe, this could include providers such as Interxion, which lost out on a merger with TelecityGroup to Equinix a few years back. Interxion would provide CyrusOne with an instant European footprint and allow it to go head to head with Digital Realty following the latter's acquisition of the former TelecityGroup/Equinix sites. Questions could also be raised about the viability of Colt Data Center Services after its split from the Colt networking business. Colt offers a mixture of connectivity-rich sites and wholesale datacenter facilities across Europe and Asia, and has aspirations to further grow globally. Or CyrusOne could simply seek a pure-play wholesale provider, although in most cases these would be local in nature, and this approach could require numerous acquisitions across Europe. It has also acquired enterprise datacenter sites in the US, where it benefits from a ready-made anchor tenant and development opportunity.

What we do know is that CyrusOne is seeking 'big format' datacenter facilities that it can build organically, as well as 'smaller platforms' through acquisition. This points more toward a retail colocation acquisition.

If CyrusOne has global ambitions, then it needs to set its sights on Europe. It will have customers in the US that will be seeking a presence in the European Union to meet incoming data regulations (namely the General Data Protection Regulation, which comes into effect in 2018), as well as to deliver lower-latency services and reduce bandwidth costs. In the US, two of CyrusOne's biggest competitors were Digital Realty and DuPont Fabros – now it only has Digital Realty (Digital Realty acquired DuPont Fabros this year), which can offer the same customers a bridge into Europe. Ireland offers easy entry with available land and low corporation taxes, and is a viable steppingstone into the UK and Europe.

However, CyrusOne realizes that it will need to move fast. It cited cloud provider customers as its main reason for acting on European expansion now – and cloud providers rarely wait for a new build as an anchor tenant. In Europe, we tend to see many seeking access to datacenter sites within six months to meet their own growth projections, and this is driving the requirement for speculative builds. Nine of the top 10 cloud companies are current customers of CyrusOne; the cloud vertical has contributed to 45-75% of its quarterly bookings since Q4 2015 and currently represents 26% of its revenue. A presence in Europe could also boost CyrusOne's interconnection business, allowing it to offer access to services on a global scale.
Penny Jones
Principal Analyst

The company's growth opportunities are expanding as it explores acquisitions and joint ventures. CyrusOne has land earmarked for greenfield development in Dublin.

Stefanie Williams
Associate Analyst

Stefanie Williams joined 451 Research in April 2011. She is a member of the Multi-Tenant Datacenters team, covering North America and Australia. Her key research areas include state and local level incentives and compliance, including FedRAMP, HIPAA, ISO, PCI-DSS, SSAE 16, SOC 2 & 3, and Uptime Institute M&O and Tier Certifications.

Keith Dawson
Principal Analyst

Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.

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