May 12, 2022
Rackspace CEO’s comments fuel speculation about another sale
Rackspace Technology CEO Kevin Jones has sparked speculation that the flagship San Antonio tech company could be up for sale again.
In a call with analysts Tuesday, Jones said that after a thorough review of the cloud computing company and “incoming interest in one of our businesses, we concluded that the sum of the valuation of the pieces of Rackspace Technology could be greater than our current enterprise value. . … We are evaluating alternatives and strategic options.”
He said the company’s value was driven in part by the “attractive growth profile of our public cloud offerings,” referring to Rackspace’s services that help midsize businesses migrate to and manage services on platforms like Amazon Web Services, Microsoft Azure and Google Cloud. .
At a minimum, Rackspace is exploring the sale of at least part of its business. But media reports at Barron’s and elsewhere have stated that Rackspace intends to go private again.
When asked by the San Antonio Report for additional information, a Rackspace spokeswoman pointed to a press release that largely repeated Jones’s quote.
If Rackspace were to be bought, it wouldn’t be the first time. Rackspace was sold in 2016 for $4.3 billion to Apollo Global Management, which took the company private before re-entering the public market in 2020. The private equity firm still owns 65.1% of the shares of Rackspace. Rack space.
Rackspace employs between 6,000 and 7,000 worldwide, with a significant portion at its headquarters in Windcrest.
Holger Mueller, principal analyst at Silicon Valley-based Constellation Research, said he interpreted Jones’s comments as a “sell signal” and that the company would likely sell the parts of the local server and cloud services business separately. He said that although the company was becoming more profitable, he felt that the on-premises server side had been around too long and growth in its cloud service side had underperformed the market.
Asked Tuesday about buyer interest, Jones said details could not be provided “due to the ongoing nature of our discussions, both internally and externally.”
Rumors of an intended sale have surfaced repeatedly since Rackspace went public for the second time in 2020.
Shortly after Rackspace’s NASDAQ debut, Reuters cited unnamed sources in a report saying that Amazon Web Services was seeking a stake in the company. No such purchase materialized.
Then last year, the company filed a report with the US Securities and Exchange Commission outlining severance benefits for executives like Jones if Rackspace is bought.
After taking Rackspace private, Apollo accelerated the company’s transformation from an Amazon and Microsoft cloud competitor to an ally. Rackspace, founded in 1998, originally sold web hosting from its local servers, stored in racks (hence the name). It still does some of that, especially for small businesses.. In the early 2010s, Rackspace entered the cloud business but was unable to compete as Silicon Valley giants squeezed that market. Rackspace went on to offer an exceptional service that helped midsize businesses use those giants’ clouds.
On Tuesday’s call, Jones said that Rackspace is considering a reorganization that would formally separate the two “very different” parts of the company.
Doing so would “unlock value,” JP Morgan analyst Tien-tsin Huang wrote in his report on Rackspace’s first-quarter earnings. Divided efficiently, white-collar service as a business would have high growth, low capital costs and low margins, she wrote. Legacy hosting as a separate business would have low growth, high capital costs, and high margins.
Jones said that more details on Rackspace’s strategy will be shared in September.
For the first quarter, Rackspace reported a net loss of $39 million on revenue of $774.5 million, marking the 10th consecutive quarter that its revenue increased.
Rackspace shares closed at $8.17 on Wednesday, after falling steadily from a peak of $26.43 in April last year.