WHO HAD THE BIGGEST ALCOHOL SALES?
Buyer is New York private equity firm that turned Hostess around.
Ending weeks of speculation, San Antonio-based Rackspace Hosting Inc. said Friday that it’s being acquired by New York private equity firm Apollo Global Management LLC in a deal valued at $4.3 billion.
“This transaction will provide Rackspace with more flexibility to manage the business for longterm growth and enhance our product offerings,” Chairman and co-founder Graham Weston said in a statement. “We are confident that as a private company, Rackspace will be best positioned to capitalize on our early leadership of the fast-growing managed cloud services industry.”
Weston said the deal, which will cash out all investors at $32 a share and take the cloud computing company private, came after months of deliberations and will “deliver immediate, significant and certain cash value to our stockholders.”
The deal represents a 38 percent 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 percent since the news about a potential sale.
“We are presented with a significant opportunity today as mainstream companies move their computing out of corporate data centers and into multicloud models,” Taylor Rhodes, president and CEO of Rackspace, said in the statement. “Apollo and its partners take a patient, value-oriented approach to their funds’ investments, and value Rackspace’s strategy and unique culture.”
The sale to Apollo is expected to close in the fourth quarter.
David Sambur, a partner at Apollo, said the private equity firm respects the company’s employees and “their commitment to
deliver expertise and exceptional service for the world’s leading cloud platforms. We look forward to working with Taylor and the entire management team and Searchlight to help advance Rackspace’s strategy and continue the company’s strong heritage of innovation.”
Apollo is known as a seasoned corporate turnaround player, breathing new life into faltering companies like Hostess Brands. Apollo bought the Hostess Brands cake business out of bankruptcy in 2013 with financier C. Dean Metropoulos for $410 million. They brought in new management and restarted operations that had gone dormant, putting the iconic Twinkie back on grocery store shelves. Hostess is now on track to go public, aiming for an initial valuation of $2.3 billion.
“Apollo is a great outfit and they’ve got a pretty good record,” Greg Rayburn, a restructuring expert who worked with Apollo as CEO of Hostess to help turn around the Twinkie maker, said in an interview before the Rackspace deal was announced. “I don’t know what Apollo’s looking at in this situation, but typically a financier who’s going to fund a go-private thinks that the enterprise value down the road will be significantly higher than the current public market value.”
The Hostess revival included closing a suburban Chicago bakery that employed 400 people. It remains to be seen what will happen to Rackspace’s current workforce.
Ivan Feinseth, chief investment officer and director of research for Tigress Financial Partners LLC, which is a Rackspace customer and owns Rackspace stock on behalf of clients, said the buyer will want to lower costs to profit from a resell later. He said the good news was that Rackspace’s trademark “fanatical support” required a robust staff.
“I really feel that the real value of Rackspace can be unlocked within a company like Hewlett Packard Enterprise or Verizon or a bigger company with a big client base that can add this to their service menu,” he said in an interview before the deal was announced.
The Rackspace sale comes nearly 20 years after three college students sold the idea of renting out server space to local real estate investor Graham Weston and his business partner, Morris Miller.
The concept took off, and Rackspace grew to become a global tech company and one of San Antonio’s top employers, with nearly 3,500 local employees. The company went public in 2008 with an initial public offering that raised $187.5 million at $12.50 a share. By 2013, its share price reached a high of nearly $80.
But what was once a Wall Street darling has struggled in recent years as tech titans such as Amazon, Microsoft, IBM and Google have come to dominate the cloud computing space, overshadowing smaller providers with sheer scale and affordability.
Some recent posts to online job site Glassdoor suggested sagging morale the company.
“Ever since I joined the company, the famous ‘Racker culture’ has been going downhill. It used to be about ‘work hard, play hard’ but the ‘play’ part has gone out (the) window,” one person wrote. “They’re stumbling hard.”
Rackspace didn’t respond to the Glassdoor comment.
Rackspace has been trying to establish a niche by joining up with former competitors and offering its trademark “fanatical support” to bigger competitors.
Lately, the company’s been touting some new deals with Amazon Web Services (AWS) and Microsoft Azure, saying it’s signed 277 AWS customers, up from 187 in April. Meanwhile, it’s been trying to ramp up its private OpenStack private cloud, In January, the company brought on former Red Hat executive Alex Pinchev to lead sales and marketing.
But while the company is showing profits, annual revenue growth has been slow, rising by less than 10 percent while revenue at the top four cloud infrastructure service companies grew at an average of 68 percent over the 12 months ended June 30, according to Synergy Research Group.
The company contributed to rumors of a sale in 2014 when it told investors it hired investment banking firm Morgan Stanley to “evaluate the inbound strategic proposals and to explore any other alternatives which could advance Rackspace’s long-term strategy.”
The company then said it decided to remain independent and promoted Taylor Rhodes from president to CEO four months later instead.
This past March, British news agency CRN reported that the company was again looking for a buyer.
The company surprised investors Aug. 8 when it reported better-than-expected profits, which surged 27 percent in the three months ended June 30. Rackspace earned $35.8 million, or 28 cents a share, in the second quarter. Rackspace was expected to earn 22 cents a share, according to the average estimate of 18 analysts polled by Bloomberg.
It generated $524 million in revenue, up 7.2 percent from $489 million during the second quarter last year.