Acquiring Rackspace (RAX +1%) would double CenturyLink's (CTL - unchanged) data services revenue, boost top-line growth, increase "customer stickiness," and "modestly [raise] leverage," writes Citi's David Phipps, making the case for a deal.
At the same time, Phipps estimates a deal for Rackspace ($5.3B current market cap) would require ~$6B in financing, which in turn would lead to a credit downgrade for CenturyLink.
CenturyLink spent $2.5B in 2011 to buy Web hosting and cloud infrastructure (IaaS) firm Savvis. But it also took a $1.1B charge last fall for its data hosting unit. The company has since bought another IaaS firm (Tier 3), and begun moving its managed data services to its cloud.
Rackspace, a major Web host and the top provider of IaaS services based on the OpenStack platform, has reportedly hired Morgan Stanley to evaluate "inbound strategic proposals" and other options.
Both Rackspace and CenturyLink are facing intense price competition from market leader Amazon, as well as Microsoft and Google.
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