Business Context and Reporting Period
Company: Digital Realty Trust, Inc. (DLR)
Filing Type: Form 8-K (Current Report)
Date of Report: September 1, 2017
Event: Supplemental disclosures regarding the proposed merger with DuPont Fabros Technology, Inc. (DFT) and the withdrawal of a preliminary injunction motion in related litigation.
Key Financial Metrics and Projections
This filing contains unaudited prospective financial information (forecasts) provided to Goldman Sachs for valuation analysis. Historical financial results are not detailed in this specific 8-K.
DLR Pro Forma Combined Company Forecasts (2017E–2021E)
| Year Ending Dec 31 | 2017E | 2018E | 2019E | 2020E | 2021E |
|---|---|---|---|---|---|
| Projected Dividends per Share | $2.75 | $3.99 | $4.39 | $4.92 | $5.36 |
| Net Debt + Preferred Stock ($M) | $9,325 | $10,014 | $10,811 | $11,339 | $11,823 |
DLR Standalone Forecasts (2017E–2021E)
| Year Ending Dec 31 | 2017E | 2018E | 2019E | 2020E | 2021E |
|---|---|---|---|---|---|
| Adjusted EBITDA ($M) | $1,303 | $1,396 | $1,529 | $1,685 | $1,844 |
| Core FFO per Share | $6.06 | $6.50 | $7.12 | $7.91 | $8.66 |
| AFFO per Share | $5.54 | $5.91 | $6.43 | $7.18 | $7.96 |
| Unlevered Free Cash Flows ($M) | $464 | $434 | $540 | $681 | $840 |
DFT Standalone Forecasts (2017E–2021E)
| Year Ending Dec 31 | 2017E | 2018E | 2019E | 2020E | 2021E |
|---|---|---|---|---|---|
| EBITDA ($M) | $356 | $428 | $482 | $523 | $579 |
| FFO per Share | $3.07 | $3.42 | $3.70 | $4.04 | $4.46 |
| AFFO per Share | $3.16 | $3.47 | $3.74 | $4.10 | $4.56 |
| Unlevered Free Cash Flows ($M) | $361 | $426 | $480 | $522 | $581 |
Material Changes and Litigation Status
- Litigation Withdrawal: Four putative class actions filed by DFT stockholders alleging misleading disclosures in the merger proxy statement were consolidated. On August 31, 2017, the plaintiff voluntarily withdrew the motion for a preliminary injunction to enjoin the merger following discussions regarding supplemental disclosures.
- Supplemental Disclosures: DLR and DFT provided additional details on the negotiation timeline, financial advisor fees, and valuation methodologies to moot the allegations in the lawsuits.
- Valuation Methodology Updates: Goldman Sachs provided updated ranges for illustrative implied equity values based on Discounted Cash Flow (DCF) and Present Value of Future Stock Price analyses.
- DFT Standalone Value: $52.45 to $69.14 per share (DCF); $45.72 to $64.55 per share (Future Stock Price).
- Pro Forma Combined Value: $119.66 to $154.87 per share (DCF); $95.98 to $141.39 per share (Future Stock Price).
- Implied Value for DFT Shareholders: $65.22 to $84.41 per share (based on 0.545 exchange ratio).
Guidance, Outlook, and Risks
Management Commentary: DLR and DFT maintain that the merger claims are without merit and that no supplemental disclosure was legally required. However, the disclosures were made to avoid litigation costs and delay. The companies continue to believe the merger is in the best interest of stockholders.
Forward-Looking Statements: The filing includes extensive cautionary language regarding the prospective financial information. The forecasts are unaudited, based on subjective assumptions, and not predictive of actual results. Neither company undertakes an obligation to update this information.
Risks and Contingencies:
- Transaction Risk: Failure to receive stockholder approval or satisfy closing conditions.
- Integration Risk: Potential for higher-than-expected costs or operational disruption.
- Forecast Accuracy: Actual results may differ materially from the provided forecasts due to economic variables and industry conditions.
Investor Verification Checklist
- Merger Vote Date: Verify the outcome of the special meetings scheduled for September 13, 2017, for both DLR and DFT stockholders.
- Valuation Assumptions: Review the specific EBITDA multiples (14.0x–19.0x) and discount rates (4.8%–8.2%) used by Goldman Sachs in the fairness opinion.
- Debt Levels: Confirm the pro forma net debt position of approximately $9.3 billion for the remainder of 2017.
- Executive Retention: Note that DFT named executive officers are not expected to continue as officers of the combined company, except for a transitional period.
- Bridge Facility: Verify that the $200 million bridge facility commitment from a Goldman Sachs affiliate is not expected to be drawn upon prior to closing.