What The Telx Acquisition Means For Digital Realty Trust

• Digital Realty Trust, Inc. (NYSE: DLR) acquired Telx from two private equity firms for $1.886 billion back in July.
• The transaction closed on October 9, prompting Ross Smotrich of Barclays to reinstate coverage of the stock with an Overweight rating and $75 price target.
• The analyst noted the acquisition enables the company to grow its retail presence and enter the high margin interconnection segment.

Digital Realty Trust, an REIT (real estate investment trust) that owns, acquires, develops and manages technology-related real estate assets, announced in July that it has entered into an agreement to acquire Telx, a privately held co-location and interconnection provider for almost $1.9 billion.

The transaction officially closed on October 9, prompting Ross Smotrich of Barclays to reassume coverage of Digital Realty with an Overweight rating and $75 price target which is based on a $73.27 discounted cash flow (60 percent), $80.31 net asset value (20 percent) and $74.39 sentiment/regression value (20 percent).

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According to Smotrich, the acquisition should be viewed positively as it enables Digital Realty to expand its retail presence and enter the high margin interconnection business. The analyst added that pro-forma, the company's revenue will be comprised of 14 percent co-location (up from 7 percent) and 9 percent interconnection (up from zero), while the remainder of the business will consist of the company's traditional wholesale offering.

"The acquired portfolio compliments Digital Realty's existing footprint both geographically and by the fact that Telx was previously a large Digital Realty customer," Smotrich concluded. "Finally, several of the acquired assets are under-utilized, creating significant lease-up potential."