Philbert Shih on Rackspace IPO and return to public markets

• June 10, 2020

Source: San Antonio Express News

Rackspace appears set for IPO

Cloud services company Rackspace Technology appears to be preparing to return to the stock market.

The San Antonio-based company, which was taken private by Apollo Global Management in 2016, informed investors on a private call this week that it confidentially filed for an initial public offering, according to Debtwire, a financial data provider.

Rackspace could be valued in an IPO at more than $10 billion.

No date has been set for a potential stock offering, but the IPO likely would happen sometime later this summer, said Reshmi Basu, an editor with Debtwire.

“The market feels way different now than in mid-March, when everything was falling off of a cliff,” Basu said. Investors “are more willing to put their money to work.”

If Rackspace goes ahead with a stock sale, investment banking firm Goldman Sachs would be the lead coordinator.

Neither Rackspace nor Apollo responded to requests for comment.

Rumors that the company would again go public have swirled since at least 2018. Less than 18 months after Rackspace was taken private, Apollo reportedly was considering an IPO, a Bloomberg News report at the time said Rackspace was founded in 1998 and became a leader in cloud computing, which lets businesses to access and store their data online.

As bigger players such as Amazon, Google and Microsoft have taken over the web-hosting services market, Rackspace in recent years has shifted toward cloud management for its clients.

The company went public in 2008 with an IPO that raised $187.5 million. Rackspace shares opened at $12.50 a share, and climbed to about $80 in 2013.

But by mid-2016, the company had lost about 60 percent of its value amid competition from the larger-scale cloud computing service providers.

In 2016, it was acquired by Apollo, a New York-based private equity firm, in a deal valued at $4.3 billion. Apollo paid $32 a share for Rackspace in taking the company private.

The company earlier this week announced its latest rebranding, changing its name to Rackspace Technology from Rackspace.

The new moniker reflects its emphasis on multi-cloud offerings, the company said. It’s focusing on providing “new solutions” in four areas, including cloud optimization, security, cloud native enablement and data modernization.

Rackspace posted $653 million in revenue in the first quarter, Debtwire reported. By comparison, the company generated $607 million in revenue over the same time span in 2019.

Basu said much of Rackspace’s revenue growth has stemmed from recent acquisitions. In 2019, Rackspace bought Onica, an Amazon Web Services consulting partner and managed service provider. The company also acquired competitor Datapipe Holdings in 2017.

The widespread, pandemic-driven shift to working from home also has been a boon for Rackspace’s business, one analyst said.

“The pandemic environment has risen the profile of cloud and data centers and IT infrastructure, so that should put (Rackspace) in a positive light, knowing they’re powering a lot of what is supporting remote work,” said Philbert Shih, managing director of Toronto-based Structure Research, a consulting firm that analyzes the internet infrastructure market. “They’ve grown through a combination of mergers and acquisitions and organic growth.”

In March, there were only two IPOs in the United States, and just four in April as the coronavirus pandemic sent shock waves through the global economy. In 2019, there were seven IPOs in March, and 14 in April, according to data provider IPO Boutique.

IPO activity has since picked up in May and June, as some economic activity has resumed. The second half of 2020 could see a healthy number of offerings, if there isn’t another large spike in COVID-19 cases, Basu said.

Given the uncertainty, Rackspace‘s lengthy track record could make it an attractive investment, Shih said.

“I do think its history, its business model combine to give investors a kind of comfort that you’re getting an established, predictable, recurring revenue business,” Shih said. “Cloud infrastructure is only going to increase in adoption and going to be more widespread on a global basis. (Rackspace) has kind of a unique combo of steadiness as well as upside.”