Business Context and Reporting Period
Company: Digital Realty Trust, Inc. (DLR) and Digital Realty Trust, L.P.
Filing Type: Form 8-K (Current Report)
Date of Report: July 10, 2017
Event: Disclosure of risks and details regarding the previously announced Agreement and Plan of Merger with DuPont Fabros Technology, Inc. (DFT), entered into on June 8, 2017.
Key Financial Metrics and Transaction Terms
Merger Consideration: Each outstanding share of DFT common stock will be converted into the right to receive 0.545 shares of DLR common stock. The exchange ratio is fixed and will not be adjusted for stock price changes.
Pro Forma Ownership: Upon completion, continuing DLR stockholders are estimated to own approximately 77% of the Combined Company, while former DFT security holders will own approximately 23%.
Debt Levels:
- DLR Indebtedness (as of March 31, 2017): $6.2 billion total ($6.2 billion unsecured, $0.6 billion revolving credit facility, $3 million mortgage debt).
- Pro Forma Combined Indebtedness (as of March 31, 2017): Approximately $7.8 billion total ($7.7 billion unsecured, $0.6 billion revolving credit facility, $0.1 billion mortgage debt).
- Revolving Credit Balances (as of July 6, 2017): DLR: $548.5 million; DFT: $336.0 million.
- If DLR terminates under certain circumstances: $300 million payable to DFT.
- If DFT terminates under certain circumstances: $150 million payable to DLR.
Material Changes and Conditions
The primary material change is the pending merger with DFT, which will significantly alter the capital structure and ownership of Digital Realty Trust. The transaction is subject to numerous conditions, including:
- Approval by stockholders of both DLR and DFT.
- Effectiveness of the registration statement on Form S-4.
- Absence of laws or injunctions prohibiting the merger.
- Receipt of legal opinions regarding REIT qualification and tax reorganization status.
- No material adverse effect on either party.
Failure to satisfy these conditions may result in the termination of the agreement and the payment of termination fees.
Outlook, Risks, and Management Commentary
Integration Risks: The Combined Company expects to incur substantial expenses integrating operations, systems, and personnel. There is a risk that anticipated synergies and cost savings may not be realized or may take longer than expected.
Stock Price Volatility: Because the exchange ratio is fixed, the market value of consideration received by DFT shareholders will fluctuate with DLR's stock price between the agreement date and closing. Based on trading between June 8 and July 6, 2017, the value of the consideration ranged from $59.26 to $66.23 per DFT share.
Financing Uncertainty: While DLR has entered into bridge loan and mortgage loan commitment letters, no definitive debt financing agreements have been secured. There is no assurance that financing will be obtained on acceptable terms or in a timely manner.
Operational Distraction: Management attention may be diverted from ongoing business activities, potentially affecting the pursuit of other strategic opportunities.
Employee Retention: Uncertainty regarding the merger may impact the ability to attract and retain key personnel from both companies.
Investor Verification Checklist
- Form S-4: Review the definitive joint proxy statement/prospectus (Form S-4) for detailed financial data and voting instructions.
- Pro Forma Financials: Analyze Exhibits 99.3 and 99.4 for unaudited pro forma combined balance sheets and income statements.
- Financing Status: Monitor for updates on the definitive debt financing agreements required to support the transaction.
- Stockholder Approval: Verify the outcome of the special meetings of DLR and DFT stockholders required to approve the merger.
- Termination Triggers: Assess the likelihood of conditions precedent failing, which could trigger the $300 million or $150 million termination fees.