Telecity falls into hands of US rival

THE company that runs a swathe of Britain’s internet service is being bought by an American predator that plans to fold it into a giant international tax haven.

Telecity operates data centres all over Europe – which house the wires that make the internet work – including sites in London and Manchester. But a £2.35bn deal will see the group snapped up by Equinix, a larger US rival.

Equinix boss Stephen Smith said that the group prided itself on paying as little tax as possible after convincing US authorities to redefine it as a property firm.

The process, which took 31 months to sign off and required a letter from America’s Inland Revenue Service, allows it not to pay tax in the US or other overseas subsidiaries covered by the arrangement.

He said the firm plans to fold as much of Telecity as possible into this structure, called a ‘Real Estate Investment Trust’, in the future.

‘Over time we will pull more of these assets into qualified subsidiaries,’ he said.

This would reduce the company’s tax rate i n the UK, currently around 25pc, to as low as 10pc.

‘It will get lower,’ he promised, but said it was unable to say how fast the company could transfer Telecity’s business into its own structure.

The group’s European headquarters are in the Netherlands, a lowtax nation previous used by Starbucks to reduce its tax bills in a structure that was slammed as ‘immoral’ by MPs. Smith added that ‘being in Amsterdam also helps’ reduce Equinix’s global tax levy.

Equinix employs around 1,200 people across Europe while Telecity has 700. Because they have overlapping operations in London, Paris, Frankfurt and Amsterdam, it is likely that regulators could force the combined firm to sell some of its assets or lay off staff.

Each currently accounts f or around 10pc of the European data centre market.

Smith said that it was too early to tell what was going to be sold, but said he expected ‘synergies’ across the whole business.

Analyst Simon Weeden at Citi said he thought that, despite the overlaps, the deal would be cleared by regulators. Equinix says it has invested £170m in the UK over the past five years and has plans to carry on spending in Britain.

Smith described it as ‘one of the top three to five markets’ for the group. Telecity had been in talks with Dutch firm Interxion about a merger designed to insulate the firm from the threat of an international takeover. The pair had even entered exclusive talks about their deal – but Telecity broke these off after receiving the US approach, believing it could get more money for the business.

It will now have to pay a £15m break fee to Interxion for scrapping the deal.

Telecity executive chairman John Hughes said: ‘Having carefully con- sidered all our options, the board believes this is a compelling offer and an excellent outcome for shareholders, employees and customers.’

Last year Telecity (12p lower at 1078p) lost its chief executive Mike Tobin. His occasionally unconventional management style once saw him arrange for members of his executive team to be kidnapped by a former KGB agent, and took his top team to spend a night in an ice hotel in a stunt designed to improve their teamwork.