Menu

01/27/17 Bill Stoller - Seeking Alpha News

Five 9s Digital: Insights Into CME's Data Center Sale-Leaseback To CyrusOne


Screen shot 2017 01 17 at 6.39.01 pm

Summary

  • One of the challenges facing every enterprise CTO is how to evaluate future data center needs in light of today's hybrid IT world.

  • CME Group's degree of difficulty was magnified by its data center supporting key customers colocated in the same facility.

  • Here is a unique perspective from industry experts at Five 9s Digital who assisted in structuring one of the largest data center sale-leaseback transactions of 2016.

CME Data Center

The $130 million sale-leaseback transaction between CME Group (NYSE: CME) and CyrusOne (NASDAQ: CONE) back in March was one of the largest and most complex data center transactions of 2016. The CME Globex electronic trading platform supported over 3.5 billion transactions in 2015, with an aggregate value greater than one thousand trillion dollars. Additionally, some of CME Group's most valuable customers and trading counterparties are colocated within this facility.

As part of the transaction, the 428,000-square foot CME Globex data center located in Aurora, Illinois, also came with a 15-acre vacant land parcel entitled for future expansion. CyrusOne has subsequently announced that it will build a massive data center on this site adjacent to the existing facility.

This sale-leaseback was actually the culmination of a multi-year effort, according to long-time CME Group COO Julie Holzrichter. Holzrichter was a featured speaker at CyrusOne's Investor Day, held in New York one week after the 15-year sale-leaseback deal was publicly announced. She focused on the rigorous vetting process which led her team to select CyrusOne as the "only logical choice" to become the future CME landlord and operating partner.

Achieving that milestone naturally led to the next phase of this transaction, i.e., working through the list of complex issues required to reach a definitive agreement to sell any corporate data center.

Helping To Structure a Win-Win

CME Group decided in the summer of 2015 to engage Charlotte-based Five 9s Digital as a consultant to help analyze and structure a sale-partial leaseback transaction.

Initially, Five 9s provided CME Group a comprehensive assessment of the data center in order to provide a baseline valuation and understanding of what it was selling. The scope of work for Five 9s included: taking into account re-purposing of existing technical infrastructure, performing sale/leaseback transaction comparisons (utilizing regional and national market data), financial analyses, as well as helping to educate internal stakeholders on transaction mechanics.

According to Five 9s principal, Doug Hollidge:

"There are a number of qualified folks in the data center marketplace with focus on specific segments of the data center arena which may include brokers, SLA consultants and legal counsel. However, very few companies can provide a full-scope analysis of a company's current situation, create a menu of available options, provide detailed financial analyses of the solutions and push the process to a successful resolution."

Meanwhile, CME Group customers were seeking efficient alternatives for their computing and data requirements in Aurora, greater cost efficiencies, and flexibility to shift toward cloud and shared infrastructure IT solutions.

Cloud and Connectivity Mattered

CME Group customers seek to monetize global information from sources such as NOAA, North Sea weather forecasts, and even social media platforms in order to improve trading outcomes.

Investors Day

Source: CyrusOne - Investor Day 2016 presentation

A comprehensive solution was co-created utilizing CyrusOne's National IX to provide interconnection and cloud access to CME Group customers.

The CME Globex data center in Aurora is tethered to the iconic 350 E. Cermack in downtown Chicago, a premier connectivity hub for the Midwest. CME's colocation customers gain direct access to Amazon Web Services, multiple cloud and IT service providers, and numerous peering opportunities.

CyrusOne provides additional offerings in Aurora, such as Disaster Recovery, Infrastructure-as-a-Service, as well as access to a robust financial ecosystem in New York and an extensive energy sector customer base in Texas.

A Difficult Assignment

What is a fair price for the data center, and what is a fair price for the leaseback terms?

Conversion of a corporate-designed data center to a multi-tenant facility can require redesign and substantial capital necessary to repurpose a facility to meet today's technology standards. Helping to identify and quantify these projected expenses and redesign components is a crucial part of the process leading to the execution of a final contract - and ultimately, the closing of the transaction.

Management teams which are proactive and decisive regarding an overbuilt facility stand to achieve better results with a sale-leaseback transaction than peers that "kick the can down the road." The longer an enterprise waits to decide about corporate-owned data centers, the more likely industry trends will make developing ground-up facilities more attractive to third-party operators.

While time is of the essence, there is still a need to educate internal corporate stakeholders on the transaction mechanics and industry standards. Five 9s helped to coordinate between legal, IT, and operations to provide C-Suite decision makers with alternatives and assist with final negotiations.

Transaction Advantages

The 428,000-square foot CME Globex data center was originally put into service in 2009 and was a state-of-the-art facility. This infrastructure, which supports electronic trading worldwide, is crucial for both CME and its valuable customer base.

Data center design and IT architectures have continued to evolve, allowing enterprise customers to do more with less space. Many corporate data centers were designed prior to the cloud computing paradigm shift and virtualization of servers. This can create "stranded capacity" in a corporate data center, where underutilized equipment still must be operated, maintained, upgraded, and replaced over time.

The sale of CME's mission-critical data center solves many of these issues. CME was able to lease the amount of space needed and contract for necessary levels of service with CyrusOne, while retaining control of the environment and security protocols. CME retained flexibility to expand as needed, with a trusted operating partner responsible for maintaining the data center and its operations.

Simultaneously, CyrusOne was able to acquire a first-class data center campus, inclusive of substantial infrastructure, anchored by CME Group leasing back 10 MW of capacity on a long-term lease. It was able to attain superior risk-adjusted returns versus the cost of buying and entitling land for development and obtaining necessary utility power for a large facility with suitable fiber connectivity in the Chicago market.

Bottom Line

All larger enterprises are somewhere along the path of evaluating a distributed, hybrid IT architecture - which can become a daunting process, beyond the scope of existing corporate resources.

Many legacy data centers have historically been viewed as corporate crown jewels. However, data centers can age out of being functional for a conversion to a multi-tenant facility. A tremendous amount of capital is tied up in the lifespan of the facilities, despite the fact that maintaining and operating data centers is not a core business focus of the company.

The decision to consider a sale or sale-leaseback always involves multiple stakeholders with various outlooks relating to a company's long-term data center solutions.

A qualified consultant can help assist the CIO and/or CTO understand and weigh various options available in today's rapidly transitioning data center solutions marketplace. This enables the team tasked with the data center evaluation to present viable total cost of ownership choices to the CFO, while addressing concerns of other stakeholders.

SLB Image

Source: Five 9s Digital

Data center solutions also are a hot topic for small and medium-sized enterprises which have similar needs. However, with the availability of third-party options such as colocation, managed services and cloud solutions, the SMB market has the opportunity to bypass the entire corporate-owned data center cycle.

"There are many cost savings opportunities available," according to Five 9s Digital Principal Steve Bollier, "we can help clients break down their existing and future data center requirements, identify an optimal solution, and streamline the implementation process."

Key Takeaways

CyrusOne was able to gain an immediate presence and customer ecosystem in the metro Chicago data center market. The same data center located in a more remote location would have been much more difficult a deal to structure.

Clearly, time is of the essence for enterprise CTOs looking to monetize facilities, as the pace of development of purpose-built multi-tenant data centers continues to accelerate in both primary and secondary US markets.

This transaction illuminates the difficulty facing publicly traded data center REITs when it comes to balancing the "lumpy" aspect of signing large wholesale enterprise lease deals, while being tasked with reporting earnings every three months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

All Research Tags

$CONE 100 MW building for sale 365 Data Centers 731 E Trade data center AI Data Center AI Data Center For Lease AI Data Center For Sale AI Real Estate AT&T data cente AWS Northern Virginia Acquires Columbus OH Data Center Acquires Data Center Acquires Data Center 2020 Acquires Phoenix Data Center Albuquerque Data Center Available Data Center Baltimore Data Center BitCoin Business For Sale BitCoin Data Center For Sale BitCoin Mining Data Center BitCoin Mining Space for Lease BitCoin Mining Space for Sale BitCoin S9 Data Center For Sale Bitcoin Business For Sale Bitcoin Cash Mining Bitcoin Colocation Bitcoin Containers Bitcoin Data Center for Sale Bitcoin Hosting Bitcoin Hosting Space Bitcoin MWs Bitcoin Mining Bitcoin Mining Development Bitcoin Mining Farm Bitcoin Mining For Sale Bitcoin Mining NC Bitcoin S19 Miners For Sale Bitcoin S19 Mining Bitcoin Space For Lease Bitcoin colocation Bitcoin hosting Bitcoin miner hosting Bitcoin mining Bitcoin mining space Boston Data Center Sold Buys Bitcoin Mining Building Buys Boston Data Center Buys Charlotte Data Center Buys Columbus Data Center Buys CyrusOne Data Center Buys Data Center Buys Data Center Business Buys Data Center in Charlotte Buys Indiana Data Center Buys Northern VA Data Centers CME Data Center CME Data Center Sale-Leaseback Centurylink Data Center Centurylink Data Center Columbus Centurylink Phoenix Charlotte Data Center For Sale Charlotte data center Chicago Data Center Chicago Data Centers For Sale Chicago T-Mobile Data Center Cleveland Data Center Cleveland data center Cloud Data Center Cloud Louisville Colocation Charlotte Colocation Louisville Columbus AWS Data Center Columbus Amazon Data Center Columbus Data Center Columbus Data Centers Columbus Indiana Data Center Columbus data center Corporate Data Center Corporate Data Center Leaseback Corporate data centers CryptoMining Business For Sale CryptoMining Data Center CryptoMining Data Center For Sale Cryptocurrency building for sale Cryptocurrency hosting Cryptomining Business For Sale CyrusOne CME CyrusOne Chicago CyrusOne Data Center CyrusOne buys CME Data Center Cyxtera Columbus Cyxtera Data Center Columbus Dallas Cloud Data Center Dallas Data Center Acquisition Dallas Data Center Market Dallas Data Centers DartPoints Data Center Data Cave Data Center 2020 Data Center 2024 Data Center Acquisition Data Center Acquisition 2020 Data Center Acquisition Charlotte Data Center Acquisitions Data Center Acquistion Data Center Acquistion 2023 Data Center Acquistions Data Center Advisor Data Center Advisors Data Center Advisory Data Center Advisory Kansas City Data Center Broker Data Center Brokerage Data Center Cap Rate Data Center Charlotte Data Center Chicago Data Center Colocation Data Center Consultant Data Center Consulting Data Center Detroit Data Center Developer Data Center Development Data Center Disposition Data Center Dispositions Data Center Expansion Kansas City Data Center For Lease Data Center For Sale Data Center Investment Data Center Investments Data Center Jacksonville Data Center Lease Data Center Lease Extension Data Center Lease Renewal Data Center Leasing Data Center M&A Data Center Market Data Center Market Phoenix Data Center Market Research Data Center Multiples Data Center Nashville Data Center News Data Center Overland Park Data Center Raleigh Cloud Data Center Real Estate Data Center Renewal Data Center Repositioning Data Center SLA Data Center Sale Data Center Sale Leaseback Data Center Sale Price Data Center Sale-Leaseback Data Center Space Data Center Tennesse Data Center acquistition Data Center broker Data Center consulting Data Center for Sale Raleigh Data Center for sale Data Center partial leaseback Data Center sale Data Centers 2019 Data Centers Charlotte Data Centers For Sale 2020 Data Centers Ohio Data Centers US Data centers Memphis Dayton data center Digital Infrastructure Digital Realty Trust Charlotte Digital Realty Trust Data Center EQT Data Center Eagan Edge Data Center Enterprise Data Center Consulting Enterprise Data Center Sale Enterprise Data Centers Enterprise data center Ethereum Hosting Ethereum hosting Bitcoin Hosting Ethereum mining space Expedient Columbus Expedient Data Centers FIS Data Center Facebook data center Fidelity Data Center Firstlight Maine Firstlight data center Five 9s Digital Five 9s Digital data centers Five 9s data center Five 9s data center market research Flexential Flexential Ft. Lauderdale Flexential Jacksonville Flexential Louisville Flexential Miami Flexential data center GPU Hosting GPU hosting GSA Data Center Google data center Government Data Center HPC Data Center Henrico County Data Center High Power Data Center Hillsboro Data Center Hyperscale Cloud IBM Data Center IBM Data Center Dallas Immedion buys Data Cave Indiana Data Center Sale Indianapolis Data Center JP Morgan Data Center JPMC Data Centers Jacksonville Data Center Kansas City Data Center Kansas City Data Center Acquisition Kansas City data center Lenoir Data Center Level 3 data center LiteCoin Mining Litecoin mining space Louisville Data Center Louisville Data Center Market Lumen Technologies Data Center Marlborough Data Center Memphis Cloud Memphis colocation Midwest Data Center Acquisitions Midwest Data Centers Minneapolis Data Center Minneapolis data center Minneapolis data centers NAIOP data center award NC data center NNN Data Center NNN Data Center For Sale NNN Data Center Lease NOVA Data Centers NOVA data center Nashville Cloud Nashville Colocation Nashville Data Center Nashville Data Center Sale Netrality chicago North Carolina Data Center North Carolina data center North Myers Data Center Northern VA Data Centers Northern Virginia Data Center Northern Virginia Data Center Market Norwalk Data Center Ohio Data Center For Sale Ohio Data Center Sale Ohio Data Center Sale-Leaseback Ohio Data Centers Ohio data center Oracle Data Center Peak 10 Jacksonville Pennsylvania Data Center Phoenix Data Center Pittsburgh AI Data Center Pittsburgh Cloud Pittsburgh Data Center Pittsburgh Data Center For Sale Pittsburgh colocation Pittsburgh data center available Pittsburgh data center for lease Pittsburgh data center for sale Portland Data Center Richmond Data Center Rochester Data Center S19 Hosting S19 Miners For Sale S19 Miners for Sale S19 Mining S19s S19s For Sale San Antonio Austin Data Centers San Antonio Carrier Hotel San Antonio Data Center San Antonio Data Center Market Sandston VA Data Center Santa Clara data centers Segra Data Center Sells Columbus OH Data Center Sells Data Center Sells Data Centers Sells Phoenix Data Center Shawnee Data Center Single-Tenant Data Center Single-Tenant Data Centers Sold Data Center South Bend Data Center Spectrum Data Center St. Louis Data Center St. Louis Data Centers Sungard AS Boston Sungard AS Data Center Switch Data Center T-Mobile Data Center Tennessee Data Centers Tierpoint Data Center Time Warner Data Center UPN Data Center Unite Private Networks Albuquerque Vacant Data Center Verizon Data Center Verizon Data Centers Virginia Data Center Windstream Data Center acquires data center amdocs data center apple data center ashburn data center for sale buys California data center buys Flexential data center buys Ohio data center buys data center california data center carrier hotel chicago centurylink data center cermak data center chicago colocation chicago data centers cloud solutions cryptocurrency mining space data center acquisition data center acquisition 2021 data center acquisitions Illinois data center advisory data center broker data center cap rate data center consultant data center consulting data center for lease data center for sale data center for sale US data center for sale illinois data center investment data center investments data center lease data center market data center market research data center news data center partial leaseback data center real estate data center sale-leaseback data centers data market research date center for lease digital infrastructure advisory five 9s five 9s digital five 9s digital chicago for lease bitcoin space grant county data center los angeles data center midwest data center netrality buys data center north carolina northern virginia data center san Luis obispo data center sells Ohio data center west virginia data center