Data centres in Switzerland
Dynamic market awaiting consolidation
Organisations produce an ever-increasing amount of data, which they need to store safely and securely. Switzerland has developed into a global hub for the storage of sensitive data and the market is growing quickly. With Microsoft, Oracle and Google all opening data centres in Switzerland this year, the sector will see dynamic change and likely consolidation.
The data centre industry is booming and there is no end to growth in sight. Data centres are critical elements of the physical infrastructure behind digital transformation: blockchain, Industry 4.0, big data, cloud computing, virtual reality, and the internet of things (IoT) all need a backbone of stable data storage locations.
There is no doubt that the strong growth in the volume of data is increasing the demand for data centres, with 90% of the world’s data estimated to have been created in the past two years. A recent study by IDC, an independent educational organisation, predicts that the amount of stored data in the EMEA region will increase at an average of 26.1% per annum between 2018 and 2025.
With innovations such as Industry 4.0, Smart Cities and IoT, the main drivers of data generation are changing. Data attributable to productivity and IoT are predicted to account for 41% of data generation by 2025 (see Graph 1). The data volume generated by these types of applications will increase as more and more connected devices come on line.
Graph 1- Changing nature of data generation: Data type share, 2015 and 2025
Being at the centre of Europe with a politically stable environment, security of power supply, strong connectivity and a reputation for technical innovation, Switzerland is an ideal location to build data centres. Between CHF 200m and CHF 400m is invested each year in developing new data centres in Switzerland. According to Switzerland Global Enterprise, the Swiss export and investments promotion agency, the country is ranked as the third most attractive location out of 37 countries in the global Data Center Risk Index.
In addition to global players such as Equinix and Colt Technology, Switzerland is home to a number of strong independent operators. The success of privately-owned operators such as Safehost and Brainserve is illustrative of the demand for high quality data centres.
Swiss data centres attract strong interest from investors
The powerful dynamics of data generation, along with visible and stable revenues from long-term contracts, are producing high returns and make data centres an attractive proposition for investors.
The robust fundamentals of data centre provision are driving substantial levels of M&A worldwide. 2017 was an exceptional year in terms of value and volume, with five deals over CHF 1 billion. Whilst 2018 deal volumes declined from the 2017 peak, we are still seeing high levels of activity in this market (see Graph 2).
Graph 2- Global data centre M&A transactions
Across Europe we are seeing strong interest from IT service providers and infrastructure funds. In May 2019 infrastructure fund Asterion Industrial Partners announced the acquisition of a portfolio of 11 data centres from international telecoms company Telefonica for c. CHF 630m. In the same month, energy provider E.on acquired Swedish data centre operator and critical facility specialist Coromatic.
Recent transactions in Switzerland have included the acquisition of data centres by Swiss IT service providers as well as the CHF 214m acquisition of Green.ch and Green Datacenter by French infrastructure fund InfraVia Capital Partners, and the carve-out of Quickline’s Datacube data centre business by Tineo, a Waterland private equity-backed company. There are also a number of other ongoing Swiss-based transactions in this sector.
Cloud computing is changing the structure of the market
Whilst the outlook for data centres is positive, it is necessary to consider how the structure of the industry is changing. With the growing prevalence of cloud computing driven by Software as a Service, and more recently Platform as a Service and Infrastructure as a Service, the ‘classic’ business model for the corporate data centre is becoming outdated.
This development has two potential impacts. First, as companies shift more of their business-critical operations on to the cloud, their storage requirements are reduced, creating an incentive to close their corporate data centres and move their legacy systems to co-location. Secondly, for those already using the co-location model it is likely that their capacity requirements will lessen.
For data centre operators, this means that the ability to retain customers and drive utilisation will depend on their ability to offer, either themselves or through strong partnerships, the IT services that their customers demand, such as cloud computing, managed services and migration. For example, in February 2018 Zurich-based hosting and data centre firm Everyware’s announced their acquisition of cloud services provider iSource. This type of vertical integration is likely to be a driving force of consolidation and we expect to see more transactions of this type.
As usage of the cloud grows, data will become concentrated in global platform providers such as Google, Amazon and Oracle. According to Cisco Global Cloud Index these hyper-scale data centres will account for 53% of all installed data centre servers by 2021, but more significantly for 87% of the workload and processing.
What next for Swiss data?
The rise of the platform providers and the inevitable consolidation of some independent providers is a long-term structural shift in the market. Data centre operators will need to adapt to this, and optimise their assets to remain competitive. However, in the short term it offers plenty of opportunities for them as the platform providers’ data centre requirements are growing at a faster rate than they can develop their own infrastructure. As a result, platform providers are the fastest growing customer segment of the co-location market.
The arrival of Google, Oracle and Azure’s platform hubs in Switzerland will give a further boost to this rapidly expanding sector as more Swiss companies make the switch to the cloud.
For some of the smaller and perhaps older data centres it might be difficult to adapt as their clients reduce their traditional storage requirements and migrate to the cloud. With these changing dynamics we expect to see excess capacity at the lower end of the market, and some price pressure created by the domination of the platform providers. This is likely to drive consolidation, which will further increase the levels of M&A activity.
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Nicola is a Senior Manager in the Financial Advisory practice with over 12 years experience in delivering M&A transactions for industrial, consumer and technology clients. She has advised several UK data centre and reseller clients on their transactions with international acquirers.