Rackspace Hosting, Inc. (RAX) Won’t Be Bought By A Carrier

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After shooting up on Friday in the wake of acquisition talk, shares of Rackspace Hosting, Inc. (NYSE:RAX) started edging lower today as analysts consider which companies might want to buy it. Raymond James analysts have an idea, and they say it won’t be a carrier.

Rackspace explores strategic options

The source of the acquisition talk surrounding Rackspace Hosting, Inc. (NYSE:RAX) is the company’s 8K filing from last week. The cloud storage company said it hired bankers to consider proposals from multiple potential companies as well as “explore other alternatives.”

In a report dated May 16, 2014, analysts Frank G. Louthan IV and Alexander Sklar say Rackspace Hosting, Inc. (NYSE:RAX) could be highly motivated to sell, especially in the wake of “the abrupt departure” of its CEO earlier this year. In addition, many believe competitive pressure on Rackspace is mounting, which could only add to the motivation.

Is Rackspace an attractive acquisition target?

Although the analysts do not name any specific companies, they say it probably won’t be a carrier that buys Rackspace Hosting, Inc. (NYSE:RAX). They think the cloud storage provider holds “a niche in the high end of cloud services for customers that want a high-touch outsourced service model.” They see this niche as remaining viable for quite some time. However, they say Rackspace also offers “a desirable combination of assets and intellectual property” which buyers may find attractive.

After attending the OpenStack Summit last week, the Raymond James team said they don’t think customers want single cloud or IT platforms. This is a positive for Rackspace Hosting, Inc. (NYSE:RAX), although competitiveness in the sector has increased dramatically. The analysts say the huge number of both hardware and software companies that are participating in the cloud storage market also indicates that one of them will buy Rackspace.

Potential suitors for Rackspace

The analysts say carriers won’t be interested in buying Rackspace Hosting, Inc. (NYSE:RAX) and see the acquisition case as “challenging.” They say carriers won’t want the company because they won’t pay “such a dilutive premium.” They believe all telephone companies offer services which managements of those companies see as being equivalent to what Rackspace offers. They also say that “colocation providers” won’t want to expand into the cloud and managed hosting because they would be competing with their customers. In addition, they’ve got issues with real estate investment trusts that they would have to deal with.

Instead of carriers, the Raymond James team identifies “companies looking to leverage existing software platforms into more of a services model” as being possible suitors for Rackspace Hosting, Inc. (NYSE:RAX). When considering the company’s statements in its regulatory filing, they think the “inbound strategic proposals” that were mentioned in that filing “must have a heavy component of non-telecom services interest.”

What might Rackspace sell for?

Raymond James analysts say Rackspace Hosting, Inc. (NYSE:RAX) current trades at about 7.5 times their 2015 EV / EBITDA. The company has a market capitalization of about $5.1 billion. They don’t believe the company’s management will sell it for “materially below” where its stock has traded over the last 12 months. As a result, they estimate that any potential acquirer would have to fork over a price that’s approaching $7 billion.

This high price tag further limits which companies might want to buy Rackspace Hosting, Inc. (NYSE:RAX). As a result, they say it’s extremely difficult to speculate which companies might be interested. In addition they say any analysis of mergers and acquisitions in the cloud storage sector is years old, which means any comparison analysis is practically worthless.

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