Has NEXTDC Ltd dodged a bullet or are investors in for a rude shock in 2018?

NEXTDC Ltd (ASX: NXT) has the right to buy data centres it leases from Asia Pacific Data Centre Group (ASX: AJD) for $300 million. Is this really a good outcome for investors?

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The share price of NEXTDC Ltd (ASX: NXT) jumped today on news that Asia Pacific Data Centre Group (ASX: AJD) will offer its portfolio of properties to the cloud computing service provider for $300 million.

The move will likely bring to an end a bitter dispute between NEXTDC and listed fund manager 360 Capital Group Ltd (ASX: TGP) with both parties fighting for control of Asia Pacific Data Centre, the responsible entity of a trust that owns the data centres where NEXTDC is the sole tenant.

The market seems to like the news with shares in NEXTDC climbing 1.5% this morning to $6.16 before returning some of the gains to trade around $6.10.

Having a way to resolve the tug-of-war with 360 Capital will remove an unneeded distraction for management and shareholders but NEXTDC will have to pay a fairly big premium for the privilege of owning the data centres outright.

Asia Pacific Data Centre said this morning that it was putting its properties up for sale for $300 million or more and has appointed a real estate agent to field inquiries. It was so far received inquiries from 50 qualified buyers but has to give NEXTDC the first right of refusal on any offer.

360 Capital is supportive of NEXTDC paying $300 million for the properties. If a third party buys the data centres, it will have to pay at least that amount under the agreement between NEXTDC and Asia Pacific Data Centre.

The $300 million price tag represents around a 40% premium to the book value of the properties as reported in Asia Pacific Data Centre's FY17 accounts or a 35% premium to the target's market cap (prior to today's announcement).

The average takeover premium (if there is such a thing) is typically between 20%-30%.

NEXTDC will probably have to take on more debt to fund the acquisition. While the company has around $270 million in cash on its balance sheet, it cannot run down its savings account.

The issue is that NEXTDC's balance sheet already looks reasonably stretched as it has a gross debt to equity ratio of 58.4% as at the end of June this year. There is some room to take on more debt post transaction, but not that much.

NEXTDC will also need a higher working capital cash buffer to own and run the data centres. This will negatively impact on its cash flow.

After all, NEXTDC did spin out its data centres into a trust managed by Asia Pacific Data Centre in 2013 to optimise its capital structure.

There are clearly pros and cons to regaining ownership of the data centres but it doesn't change the bright outlook for the sector as the demand for cloud computing and data centres are tipped to outstrip supply over the next few years.

This is probably why Asia Pacific Data Centre is getting so much interest for the properties from other buyers and it is not a given that NEXTDC will ultimately end up with control of the data centres. The company may just be swapping one landlord for another.

I am bullish on the longer-term prospect for NEXTDC and I doubt the ultimate ownership of the data centres will change the outlook for the company.

There are other well-placed companies that are tipped to have a big impact on our market for 2018 and beyond. The experts at the Motley Fool have uncovered three that should be on your radar.

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Motley Fool contributor Brendon Lau owns shares of NEXTDC Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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