Rackspace In Place For Apollo’s $4.3B Take-Private Deal

Rackspace In Place For Apollo’s $4.3B Take-Private Deal by Adam Putz, PitchBook

Apollo Global Management is taking Rackspace (NYSE: RAX) private for $4.3 billion. The deal, which includes a strategic equity investment from Searchlight Capital Partners, represents the last best chance that Rackspace has to innovate and compete in a cloud-computing market that has come to be dominated by larger players since its 2008 IPO.

Rackspace co-founder and chair, Graham Weston, points to two big reasons why his company has made the move back into the private market.

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First, amid slowing sales growth, Weston points out in a prepared statement on the Apollo deal that going private will provide “immediate, significant and certain cash value to our stockholders.”

Second, Weston points out in the same statement that it will provide “more flexibility to manage the business for long-term growth and enhance our product offerings.” Spending less time reporting on short-term earnings—to say nothing of meeting regulatory demands—means that senior leadership can focus on improving product offerings within the average holding period of four to eight years for most PE firms. Building or rebuilding a long-term strategy, especially in a dynamic space like cloud computing, with extra time and money to do so goes a long way to explaining why Rackspace will go private.

But neither of these reasons is unique to the company’s situation.

Since its IPO, Rackspace has shifted focus to fit with, rather than take on, the big three cloud-computing service providers: Amazon, Microsoft and Google. “The cloud infrastructure-as-a-service space has consolidated,” Shebly Seyrafi, an analyst with FBN Securities in New York, told the WSJ. “There’s not a lot of other players left to gobble up.

Rackspace stockholders are set to receive $32 per share in cash, with the deal expected to close by the end of this year. That represents a 38% premium on the company’s unaffected closing stock price on August 3, just before reports of a potential sale. Rackspace hit its highest share price in early 2013 at $78, though short-sellers had been betting against it since April this year, with short interest at $404 million ahead of Friday’s announcement, according to Ihor Dusaniwsky of S3 Partners via Business Insider.