CenturyLink Said to Seek to Acquire Rackspace Hosting

CenturyLink Inc. (CTL), the Louisiana-based landline phone service provider, is seeking to acquire Rackspace Hosting Inc. (RAX) to further expand into cloud-computing services, according to people familiar with the situation.
CenturyLink has discussed the idea with San Antonio-based Rackspace, which last month said it is still conducting an internal review of its strategic options, according to the people, who asked not to be identified talking about private information. One person said a deal may not be reached for the company, which had a stock-market valuation of $5.33 billion at the end of last week.
The deal would add more Internet and cloud services to
CenturyLink’s roster of phone and data communications packages, helping it better compete against Amazon.com Inc. (AMZN) in Web-based services. Microsoft Corp. (MSFT) and Google Inc. (GOOG) are also vying for business as companies transition from owning and operating servers to renting space in the cloud.
“Strategically, it would be a good acquisition,” said Donna M. Jaegers, a Denver-based analyst at DA Davidson & Co. with an “underperform” rating on Monroe, Louisiana-based CenturyLink. “The price would be a little rich” based on Rackspace’s market value, she said by telephone yesterday.
Odds of the deal going through are less than 50 percent unless Rackspace is willing to take payment in stock or enter a joint venture, Jaegers said. CenturyLink wants to avoid a debt downgrade that may come with financing a large deal, she said.
Christina Weaver, a spokeswoman for Rackspace, declined to comment, citing company policy. Kelly Sullivan, a representative for CenturyLink at Joele Frank Wilkinson Brimmer Katcher, also declined to comment.

Strategic Review

For Rackspace, the deal would cap a strategic review that started in May after years of takeover speculation. Rackspace hired Morgan Stanley earlier this year to seek strategic options and explore ways to expand the business after the company said it had been approached by multiple groups interested in a partnership or acquisition.
Rackspace’s shares have fallen about 53 percent from a record closing price of $79.24 in January 2013. Still, the stock, which closed at $37.24 on Sept. 5, has tripled since the company’s initial public offering in 2008.
Like Amazon and Google, Rackspace uses servers and software to help companies offload portions of their computing and storage work. Moving to cloud services has been a popular trend among companies looking to save on the cost of buying equipment and operating their own data centers.

Sales Growth

Rackspace’s sales climbed 17 percent in 2013 to $1.53 billion, with $415.2 million coming from cloud computing. CenturyLink’s revenue declined 1.5 percent to $18.1 billion last year.
For CenturyLink, this would be the second acquisition of a cloud-computing company in the past year. In November, CenturyLink bought Tier 3 Inc. for an undisclosed sum.
CenturyLink’s largest acquisition was the $22 billion takeover of Denver-based regional phone company Qwest Communications International Inc., which was completed in 2011. As of Sept. 5, CenturyLink had a total market value of $23.6 billion.
Rackspace’s co-founder and chairman, Graham Weston, was called in to take over as interim chief executive officer in February after the retirement of Lanham Napier, who was CEO for eight years. When Napier left, Rackspace hired a search firm to find a long-term replacement, though the company gave no specific timeline for the move. Weston had been CEO from 1999 until 2006, when Napier was named as his successor.