Why the NextDC Ltd share price is hitting another record high today

The $1bn acquisition of a rival by US-based Equinix has sent shares in NextDC Ltd (ASX:NXT) soaring 5%. It may sound counterintuitive to many, but there’s a reason why NextDC is a hot favourite today.

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News that data centre operator rival to NextDC Ltd (ASX: NXT), Metronode, has been sold to US-based Equinix for around $1 billion has sent the share price of NextDC surging by 5% to a record high of $5.94 during lunch time trade.

Some might have thought the acquisition would be a negative for NextDC as the merger will make Equinix a much tougher competitor. Post the transaction, Equinix is expected to become the third-largest operator in Australia with a 14% market share with annual revenue of over $300 million, according to the Australian Financial Review.

Instead, the sale process has only put the spotlight on the potential lack of data centre capacity over the next few years in the local market as Equinix’s offer price represents a whopping 20+ times the earnings of Metronode.

Equinix is believed to have been bidding against other suitors for Metronode, including Brookfield. I can only guess that the bidding war was intense given the hefty premium Equinix was willing to cough up.

If shareholders in NextDC are worried about competitive pressure, Citigroup thinks they shouldn’t be. The broker doesn’t see much impact on NextDC outside of Equinix being able to strengthen some domestic relationships through the merger.

If anything, the transaction has also strengthened Citigroup’s “conviction buy” call on the stock.

“Over the medium term, cloud-based storage demand will vastly outstrip supply leaving the data centres as the winners,” said the broker.

“NextDC is best placed in the Australian market to take advantage of the booming growth as the demand for cloud computing grows exponentially.  We think FY18 guidance looks conservative, their track record shows a history of posting conservative guidance and upgrading it over time.”

NextDC’s share price has gained around 63% this calendar year compared with a circa 6% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

Merger and acquisition activity in the IT space is heating up. The deal to buy Metronode comes on the same day that Aconex Ltd (ASX: ACX) received a $1.6 billion bid from US tech giant Oracle.

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Motley Fool contributor Brendon Lau owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of and has recommended ACONEX FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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