Apollo Global Agrees To Acquires Rackspace For $4.3B

Apollo Global has agreed to purchase cloud seller Rackspace for $4.3B, a 38% premium to its closing price on August 3.


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.

Rackspace sees Amazon and Microsoft as partners despite its relatively small size. The logic behind the deal is that going private will allow Rackspace to transition towards the service of moving corporate computing to cloud-based networks with more time, space and less scrutiny under the public watch.

Do you agree with this reasoning?

Apollo's advisers and financiers consist of Barclays, Citigroup, RBC Capital Markets, and Deutsche.

http://www.bloomberg.com/news/articles/2016-08-26…

 

I have a lot of questions and would be grateful if someone could help:

Is this an LBO ? as in, was there significant leverage employed ? given the buy-side advisory I would think that it's the case. Why is there a need for so many buy-side advisors ? is it that tough to raise 6x/7x leverage ? ya think the 30% is only justified by the control premium ? any idea of what Apollo's IRR threshold looks like ? who are the guys investing in equity alongside the godly Apollo ? previous investors ?

 
Best Response

Skipping the technical elements of your question, I can say that Searchlight is a new firm (2014-ish) run by three guys all from different places. Eric is ex-Apollo (so there's your connection to this deal right away), Oliver is ex-KKR, and there's a third guy who was on the LP side at OTPP who was pretty instrumental in expanding their direct PE activity.

Their associate classes are small (makes sense given the youth of the firm, but smaller than you'd think given the scale of the capital base right out of the gate). I know they took one BX M&A guy for a 2015 start and one Evercore guy for a 2017 start.

I am permanently behind on PMs, it's not personal.
 

This will be a LBO. To syndicate billions of dollars of debt will usually require a syndicate of banks. Because this is a LBO, the debt placement will be backstopped by the banks if syndication doesn't go successfully. For risk mgmt reasons, no single bank will take that much balance sheet risk. And yes, 7x leverage is a lot and considered fully levered for a tech or telecom business.

 

Rackspace is likely screwed. They are less customer friendly than Amazon cloud (and less reliable), while also being more expensive. They really need to buy Heroku (or something similar?) before someone else does to become much more dev friendly, If they want to compete, you can't be more expensive and harder to work with. Maybe their large enterprise stuff is better, but I've never heard that???

 
midwestbiggie:

The people who truly use the cloud with true platforms I've heard the exact opposite. Not plug and plays like Amazon caters to.

Not following you at all... I was saying that Amazon is way easier. Heroku is an additional layer that is the most dev friendly experience. I run a tech company that started on Amazon, went to Rackspace (which went poorly) and moved to a services provider that sits on top of Amazon, which has worked well. We use Heroku for our staging environment, and our devs love it.

 

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