CenturyLink sells data center, colocation business to VC consortium, allocates funds for Level 3 deal

CenturyLink has reached an agreement to sell its colocation and data center business for $2.15 billion in cash and a $150 million minority stake to a consortium led by BC Partners and Medina Capital, closing another telco’s chapter in the challenging data center business market.

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The service provider said it would use the net proceeds from this sale to partly fund its $34 billion acquisition of Level 3 Communications, which the company announced on Monday.

Although CenturyLink won’t own the data centers anymore, the telco will continue to offer colocation services as part of its product portfolio through commercial relationships it will enter into at closing with the BC Partners/Medina-led consortium. CenturyLink will continue to focus on offering customers a wide range of IT services and solutions, including network, managed hosting and cloud.

Upon closing the deal, the BC Partners/Medina-led consortium will assume ownership of CenturyLink's portfolio of 57 data centers. The data center portfolio includes approximately 195 megawatts of power across 2.6 million square feet of raised floor capacity.

The purchase agreement contains various customary covenants for transactions of this type, including commitments from CenturyLink to indemnify the purchaser for certain taxes and other specified matters, subject to certain limitations.

Set to close in the first quarter of 2017, the acquisition is subject to regulatory approvals, including filings under the Hart-Scott-Rodino Antitrust Improvements Act and a review by the Committee on Foreign Investment in the United States, as well as other customary closing conditions.

In addition to purchasing CenturyLink’s data center assets, the new joint venture is acquiring four security and analytics companies, which were previously part of the Medina Capital portfolio – Cryptzone, Easy Solutions, Brainspace and Catbird.

Upon closing, the company will have over 3,500 customers and 2.6M square feet of raised floor capacity, and will be exceptionally well-positioned to pursue opportunities in the managed security market, which Gartner estimated will grow to $113.4 billion by 2020.

News of this deal should not be of any surprise.

In September, a Reuters report suggested that GTCR, Charlesbank Capital Partners, Berkshire Partners and Stonepeak Infrastructure Partners were going to hatch a joint bid for the data center facilities.

Given the capital challenges to maintain and operate a data center business, CenturyLink isn’t the only telco that’s been reviewing its data center business. Windstream sold its data center business to TierPoint, a data center specialist, for $575 million in October 2015.

Verizon is also looking for a buyer for its data center business. In January, Reuters reported that the telco has devised a plan to sell its data center business in a potential $2.5 billion deal. Verizon's colocation assets include 48 data centers, which currently generate earnings of about $275 million. However, no deal has been made yet.

Fran Shammo, CFO of Verizon, told investors during the telco’s third quarter earnings call that they are negotiating with just one unnamed party.

“We should have something to formally announce to everyone early in the fourth quarter,” said Fran Shammo, CFO of Verizon.

Earlier, a Cowen & Co. investor note suggested that Verizon may be close to selling its data centers to Equinix, a data center specialist, for nearly $3.5 billion, marking the telco’s desire to sharpen its focus on its more profitable wireless and fiber-based business lines.