Rackspace Hosting, Inc. (RAX) Soars On Buyout Speculation

Rackspace Hosting, Inc. (RAX) Soars On Buyout Speculation

Rackspace Hosting, Inc. (NYSE:RAX) said in a regulatory filing with the Securities and Exchange Commission this week that it is currently exploring strategic options, including everything from an acquisition to a partnership. The cloud storage provider said multiple parties have approached it to discuss strategic relationships. As a result, the company’s board of directors has selected Morgan Stanley (NYSE:MS) to evaluate all of the proposals it has received and consider alternatives to its long-term strategy.

What others want with Rackspace Hosting

In a report dated May 15, 2014, Morgan Stanley analysts Simon Flannery and Lisa Lam reiterated their Overweight rating on Rackspace Hosting, Inc. (NYSE:RAX). They note that the company is the biggest independent cloud provider. Because of its positioning, there have been acquisition rumors surrounding it for quite some time.

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Rackspace Hosting, Inc. (NYSE:RAX) competes with International Business Machines Corp. (NYSE:IBM)”s SoftLayer, CenturyLink, Inc. (NYSE:CTL)’s SAVVIS, and Verizon Communications Inc. (NYSE:VZ)’s Terremark in the dedicated cloud industry. In the public cloud segment, Rackspace faces off with Amazon.com, Inc. (NASDAQ:AMZN)’s AWS, Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s Google Cloud, Microsoft Corporation (NASDAQ:MSFT)’s Azure, Hewlett-Packard Company (NYSE:HPQ), and Cisco Systems, Inc. (NASDAQ:CSCO).

Comparing Rackspace to others

The Morgan Stanley team says the most logical comparisons for Rackspace Hosting, Inc. (NYSE:RAX) in terms of acquisitions are SoftLayer, SAVVIS and Terremark. All of them have been acquired by their respective parent companies within the last three years.

They say the average multiple “on an LTM EV / EBITDA pre-synergies basis” for the three deals is 15.7 times. Rackspace Hosting, Inc. (NYSE:RAX) had a market capitalization of about $4 billion at the time the Morgan Stanley team wrote its report, already making it larger than the other three companies, however. Since their report, shares of Rackspace have soared so much that the company’s market cap is now more than $5.2 billion.

Reiterating Overweight rating on Rackspace

The analysts have reiterated their Overweight rating on Rackspace Hosting, Inc. (NYSE:RAX), noting the cloud company’s improving growth in revenue and also its discounted valuation. In the first quarter, Rackspace’s revenue reaccelerated year over year due to rising adoption of hybrid cloud services.

They say Rackspace Hosting, Inc. (NYSE:RAX) stock is one of the cheapest in their space. At the time they wrote their report, it was trading at a multiple of 6.1 times 2015 estimated EV / EBITDA.

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