Rackspace goes private with $4.3bn Apollo Global transaction

Picture credit: Rackspace Afterparty TechStars Boulder 2011, by Andrew Hyde, used under CC BY / Modified from original

Managed cloud services provider Rackspace is to be acquired by private equity company Apollo Global Management for $4.3 billion (£3.26bn), it has been announced.

“This is a big day for Rackspace,” wrote Taylor Rhodes, Rackspace CEO, in a blog post. “We expect that this transaction will help us better serve our customers in 120 countries, who now include more than half of the Fortune 100.

“It will allow us additional flexibility to enhance the multi-cloud services that today’s customers demand, and to seize the big opportunity that we face as the world’s #1 managed cloud company,” Rhodes added.

The deal’s total $4.3bn value includes the assumption of $43 million of net cash, with shares going at $32.00 each, representing a 38% premium as of August 3 – which Rackspace notes was the last trading day “prior to news reports speculating about a potential transaction.”

Graham Weston, co-founder and chairman of Rackspace, said the move was a result of “diligent analysis and thoughtful strategic deliberations” by the board across many months. “We are confident that as a private company, Rackspace will be best positioned to capitalise on our early leadership of the fast-growing managed cloud services industry,” he said.

As the press material inferred, speculation has been rife for most of the previous month around Rackspace’s future.

Earlier in August, the company sold its Cloud Sites business unit to Michigan-based hosting provider Liquid Web. Speaking to analysts a few days before around Rackspace’s latest financial results – 277 customers on its AWS service over the past nine months with 60% choosing the higher tier option the highlight – Rhodes refused to comment on speculation, but noted that 2017 IT spending growth would “almost certainly” be negative – with Gartner statistics on the Brexit EU referendum vote cited as a possible reason – and that selling “non-core” Cloud Sites would give the company “more focus.”

This story however goes back a bit further. Back in 2014, the company did an abrupt about-turn after considering various M&A options before deciding to carry on alone. Rhodes was named CEO at the same time; Weston had stepped into the breach following the retirement of Lanham Napier six months earlier.

Ian Moyse, a cloud industry leader – and formerly senior sales exec at Rackspace – said the news came as no surprise, and sounded a cautious note around its AWS and Azure services. “Those at the top will have felt pressures to do something different and separate themselves from the shackles of current measurements,” he told CloudTech. “This will give them some breathing space to reshape their market position, but they are going to have to sell an awful lot more of these cheaper third party services at lower resale margins to get anywhere near the results of their past.

“The next 24 months is going to be key to Rackspace to reposition itself in the lucrative cloud and IoT markets,” he added.

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