Web-hosting vendor Rackspace sells for $4.3 billion

August 26, 2016 11:21 AM

Rackspace Hosting Inc., the leading web hosting vendor to retailers in the Internet Retailer 2016 Top 1000, is getting a new owner. Apollo Global Management LLC agreed to buy the cloud-services company for $4.3 billion.

The New York-based private equity firm will buy San Antonio-based Rackspace for $32 a share in an all-cash transaction, according to a statement Friday. As part of the deal, funds managed by Searchlight Capital Partners will make an equity investment in the acquired company. The deal is expected to be completed in the fourth quarter.

With 220 retailers in the Top 1000, Rackspace is the No. 1 web hosting provider to North American online retailers. Those clients combined have $19.57 billion in annual web sales, according to data. Clients include CDW Corp. (No. 13), Kohl’s Corp. (No. 19), Warby Parker (No. 197) and Starbucks Corp. (No. 443). Inc.’s web hosting service, with 117 clients in the Top 1000, is the No. 2 web hosting vendor for North American online retailers.

Rackspace has struggled to compete in the accelerating race to move corporate computing to the cloud. While the company still counts Inc. and Microsoft Corp. as hosting rivals, Rackspace has more recently started working with companies to shift their IT operations to its larger competitors’ servers. Becoming a private company will give Rackspace the time and space to complete the transition, the company says.

Rackspace is “gaining traction, but they’re very small,” said Joshua Yatskowitz, a Bloomberg Intelligence analyst. “Bringing it out of the public eye can make that transition a lot easier for them.”

The deal represents a 38% premium to Rackspace’s closing price on Aug. 3, before a Wall Street Journal report about the potential sale boosted share prices. The stock has risen about 30% since the news about a potential sale.

Rackspace on Aug. 8 reported second quarter net revenue of $523.6 million, up 7.0% from $489.4 million in the year-ago period. Net income for Q2 ended June 30 was $35.8 million compared with $28.3 million a year ago.

“This transaction will provide Rackspace with more flexibility to manage the business for long-term growth and enhance our product offerings,” Graham Weston, chairman and co-founder of Rackspace, said in the statement announcing the deal. “As a private company, Rackspace will be best positioned to capitalize on our early leadership of the fast-growing managed cloud services industry.”

In September 2014, CenturyLink Inc., a Louisiana-based landline phone service provider, was said to be in talks to acquire Rackspace to further expand into cloud-computing services.

Last year, Apollo acquired Presidio Inc., an information-technology consulting company. The private-equity firm also has taken a number of companies private this year, including home-security company ADT Corp., which at $12 billion was the biggest private equity-backed acquisition announced this year.

Apollo’s advisers for the deal are Citigroup Inc., Deutsche Bank AG, Barclays Plc and RBC Capital Markets. Paul, Weiss, Rifkind, Wharton & Garrison LLP acted as legal adviser. Goldman Sachs Group acted as Rackspace’s financial adviser. The company’s legal adviser was Wilson Sonsini Goodrich & Rosati.

Bloomberg News contributed.




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