Equinix,
Inc. (Nasdaq:EQIX),
the global interconnection and data center company, today announced that
its Board of Directors has approved a plan for Equinix to pursue
conversion to a real estate investment trust (REIT). Equinix’s Board
reached this decision after thorough analysis of various structures,
including alternative financing, capital, and tax strategies, designed
to maximize long-term shareholder value. If Equinix is ultimately
successful in the conversion process, Equinix expects to elect REIT
status for its taxable year beginning January 1, 2015.
Peter Van Camp, Executive Chairman of Equinix, said, “We are committed
to creating long-term shareholder value. The REIT structure supports
this objective and positions us to achieve profitable, strategic growth
domestically and internationally. We believe the conversion process, and
the REIT structure itself, will have virtually no impact on the delivery
of services to our customers or the performance of our global platform
of high performance data centers.”
“As a REIT, we will be able to provide our shareholders with regular
distributions from earnings. While operating as a REIT, we will continue
to fully execute on our global growth strategy of expanding in markets
where demand and financial return warrant. We are executing with
discipline and focus, and remain on target to generate over $3.0 billion
in annual revenue by 2015 and positive adjusted free cash flow in 2013,
excluding REIT conversion costs and tax liabilities,” said Steve Smith,
CEO of Equinix. “We have already seen several of our peers in the data
center industry operate under a REIT structure, and we believe that this
tax-efficient structure will enhance shareholder value and enable us to
be even more competitive.”
Equinix has determined that it is advisable to seek a private letter
ruling (PLR) from the Internal Revenue Service (IRS) in connection with
its proposed REIT conversion, and anticipates filing the PLR request
with the IRS by the end of 2012. Equinix expects to seek favorable
rulings from the IRS on numerous technical tax issues, including
classification of Equinix’s data center assets as qualified real estate
assets. Even after utilization of available net operating loss
carryforwards, classifying Equinix assets as real estate is expected to
result in a tax liability due to the reclassification to real property
of certain assets that had been depreciated and amortized as personal
property and the resulting recapture of depreciation and amortization
expenses. The total recapture of depreciation and amortization expenses
across all relevant assets is expected to result in U.S. tax liabilities
of approximately $340 to $420 million, which have been accrued as income
tax liabilities on Equinix’s balance sheet. These amounts may still be
payable in the four-year period starting 2012 even if Equinix abandons
the conversion plan for, among other reasons, failing to receive the PLR
it is seeking. As Equinix will use its net operating loss carryforwards
(“NOLs”) to offset a portion of these tax liabilities, it anticipates
that it will utilize all of its NOLs in 2012.
In accordance with tax rules applicable to REIT conversions, Equinix
expects to issue a special distribution to Equinix shareholders of
undistributed accumulated earnings and profits (E&P) of approximately
$700 to $1,100 million, to be paid out in a combination of up to 20% in
cash and at least 80% in Equinix common stock. Equinix expects to make
the E&P distribution only after receiving a favorable PLR from the IRS
and anticipates making a significant portion of its E&P distribution
before 2015, with the balance distributed in 2015. In addition,
following the completion of the REIT conversion, Equinix intends to
declare regular distributions to its shareholders.
“We will be preserving the growth characteristics of the company while
optimizing our global tax strategies, creating significant shareholder
value,” said Keith Taylor, CFO of Equinix. “We have done the work
necessary to feel comfortable that we can operate as a REIT. However,
there are a number of hurdles yet to be cleared given the operational
complexities to be addressed prior to conversion.”
Equinix believes it can meet the operational and technical REIT
requirements by reorganizing its operations to facilitate its
qualification as a REIT. As part of this reorganization, Equinix expects
to structure its domestic operations and a portion of its international
operations as Qualified REIT Subsidiaries (QRS). Equinix’s planned
timeframe for REIT election is driven by a number of factors, including:
(1) the requirement to separate Equinix’s domestic business into Taxable
REIT Subsidiaries (TRS) and QRS; (2) the extent of Equinix’s global
operations and the need to separate certain of its international
subsidiaries into the QRS/TRS structure; (3) the complexity of required
modifications to internal accounting, information technology and real
estate systems; (4) further review and development of optimal domestic
and international structures; and (5) refinement of the REIT testing
process.
Equinix expects, in addition to its E&P distribution and recapture of
depreciation and amortization expenses, to incur approximately $50 to
$80 million in costs to support the conversion process. If the
conversion is ultimately successful, Equinix expects to incur additional
annual compliance costs of approximately $5 to $10 million.
The company will consider the issuance of debt and/or equity to support
projected conversion-related cash requirements, including shareholder
distributions, tax payments and other conversion costs noted above.
In addition to other actions required in connection with the proposed
REIT conversion, Equinix will be required to obtain shareholder approval
to effect the necessary corporate reorganization, including the addition
of a provision in Equinix’s charter to establish REIT-related ownership
restrictions. Should Equinix fail to complete the conversion process, it
still will have incurred substantial costs in this effort.
Principal advisors to Equinix related to the proposed REIT conversion
are Sullivan & Worcester LLP, J.P. Morgan Securities LLC, Green Street
Advisors, and Deloitte Tax LLP.
Equinix expects to discuss its plan to convert to a REIT on its
quarterly conference call for the third quarter 2012.
About Equinix
Equinix, Inc. (Nasdaq: EQIX), connects more than 4,000 companies
directly to their customers and partners inside the world’s most
networked data centers. Today, businesses leverage the Equinix
interconnection platform in 38 strategic markets across the Americas,
EMEA and Asia-Pacific. www.equinix.com
Forward-Looking Statements
This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and
other securities laws. The forward-looking statements involve risks and
uncertainties. Actual results may differ materially from expectations
discussed in such forward-looking statements. Although Equinix believes
that its forward-looking statements are based on reasonable assumptions,
its expected results may not be achieved, and actual results may differ
materially from its expectations. For example:
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This press release states that Equinix plans to pursue conversion
to a REIT and that Equinix believes it can meet the operational and
technical REIT requirements. In fact, there are significant
implementation and operational complexities to address before Equinix
can convert to a REIT, including obtaining a favorable PLR from the
IRS, completing internal reorganizations and modifying accounting,
information technology and real estate systems, receiving shareholder
approvals and making the E&P distribution. Equinix can provide no
assurance when conversion to a REIT will be successful, if at all. In
addition, REIT qualification involves the application of highly
technical and complex provisions of the Internal Revenue Code of 1986,
as amended (the Code), to Equinix’s operations as well as various
factual determinations concerning matters and circumstances not
entirely within Equinix’s control. Although, if it converts to a REIT,
Equinix plans to operate in a manner consistent with the REIT
qualification rules, Equinix cannot give assurance that it will so
qualify or remain so qualified.
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This press release states that Equinix expects to fully execute on
its growth strategy. However, Equinix may be unsuccessful in executing
on its growth strategy for a number of reasons, including complying
with tax rules relating to REITs. Under the Code, no more than 25% of
the value of the assets of a REIT may be represented by securities of
one or more TRS and other nonqualifying assets. This limitation may
affect Equinix’s ability to make large investments in other non-REIT
qualifying operations or assets. As such, compliance with REIT tests
may hinder Equinix’s ability to make certain attractive investments,
including the purchase of significant nonqualifying assets and the
material expansion of non-real estate activities.
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This press release restates certain of Equinix’s expectations for
annual revenue and adjusted free cash flow targets, but actual results
may differ materially from these expectations. Factors that might
cause such differences include, but are not limited to, the challenges
of acquiring, operating and constructing IBX centers and developing,
deploying and delivering Equinix services; unanticipated costs or
difficulties relating to the integration of companies Equinix has
acquired or will acquire into Equinix; a failure to receive
significant revenue from customers in recently built out or acquired
data centers; failure to complete any financing arrangements
contemplated from time to time; competition from existing and new
competitors; the ability to generate sufficient cash flow or otherwise
obtain funds to repay new or outstanding indebtedness; the loss or
decline in business from our key customers; and other risks.
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This press release states that Equinix expects to seek a PLR from
the IRS before converting to a REIT. Equinix can provide no assurance
that it will receive a favorable PLR from the IRS, or that it will
receive such a ruling in a timely manner to convert successfully to a
REIT as of January 1, 2015. Further, changes in legislation or the
federal tax rules can adversely impact Equinix’s ability to convert to
a REIT or the benefits of being a REIT.
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This press release states that Equinix plans to elect REIT status
for the taxable year beginning January 1, 2015. In fact, Equinix does
not know when, if at all, it will elect REIT status, and it may not do
so. Further, as described in this press release, many
conditions must be met in order to complete the conversion to a REIT,
and the timing and outcome of many of these are beyond Equinix’s
control.
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This press release states that Equinix believes electing REIT
status will provide significant benefits to shareholders, enhance
value and provide regular distributions from earnings. Equinix’s Board
of Directors considered a variety of strategies, and there can be no
assurance that conversion to a REIT will be the most beneficial of the
alternatives considered.
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This press release states that Equinix anticipates its NOLs will be
used in 2012, in part as a result of using them to shield a portion of
the depreciation recapture tax liabilities. In fact, Equinix can
provide no assurance as to when its NOLs will be fully utilized, the
timing of which would be impacted by, among other factors, Equinix’s
profitability.
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This press release provides an estimated range of Equinix’s E&P
distribution. Equinix is in the process of conducting a study of its
pre-REIT accumulated earnings and profits as of the close of Equinix’s
2011 taxable year using Equinix’s historical tax returns and other
available information. This is a very involved and complex study,
which is not yet complete, and the actual result of the study relating
to Equinix’s pre-REIT accumulated earnings and profits as of the close
of Equinix’s 2011 taxable year may be materially different from
Equinix’s current estimates. In addition, the estimated range of the
E&P distribution is also based on Equinix’s projected taxable income
for its 2012, 2013, and 2014 taxable years and its current business
plans and performance, but Equinix’s actual earnings and profits (and
the actual E&P distribution) will vary depending on, among other
items, the timing of certain transactions, its actual taxable income
and performance for 2012, 2013, and 2014 and possible changes in
legislation or tax rules and IRS revenue procedures relating to
distributions of earnings and profits. For these reasons and others,
Equinix’s actual E&P distribution may be materially different from the
currently estimated range.
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This press release states that Equinix anticipates making a
significant portion of the E&P distribution before 2015, with the
balance distributed in 2015, to be paid out in a combination of up to
20% in cash and at least 80% in Equinix common stock. The timing of
the planned E&P distribution, which may or may not occur, may be
affected by potential tax law changes, the completion of various
phases of the REIT conversion process and other factors beyond
Equinix’s control. In addition, Equinix may decide, based on its cash
flows, strategic plans, IRS revenue procedures relating to
distributions of earnings and profits, leverage and other factors, to
pay these amounts in a different mix of cash and common stock.
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This press release states that Equinix plans to make regular
distributions to shareholders after the completion of the REIT
conversion process. Equinix can provide no assurance that it will make
future distributions, and any future distributions will be dependent
on Equinix’s cash flows, as well as the impact of alternative, more
attractive investments to distributions.
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This press release provides ranges of Equinix’s estimated costs to
convert to a REIT, including estimated tax liabilities associated with
a change in the company’s method of depreciating and amortizing
various assets and annual compliance costs. Equinix’s estimate
of these taxes and other costs may not be accurate, and such costs may
turn out to be higher than Equinix’s estimates due to unanticipated
outcomes in the PLR, changes in Equinix’s business support functions
and support costs, the unsuccessful execution of internal planning,
including restructurings and cost reduction initiatives, or other
factors.
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This press release states that Equinix may issue a portion of the
E&P distribution in shares of its common stock and that it will
consider the issuance of equity to support projected
conversion-related cash requirements. Whether Equinix issues equity,
at what price and amount and other terms of any such issuances, will
depend on many factors, including alternative sources of capital,
Equinix’s then existing leverage, Equinix’s need for additional
capital, market conditions and other factors beyond Equinix’s control.
If Equinix raises additional funds through the issuance of equity
securities or debt convertible into equity securities, the percentage
of stock ownership by Equinix’s existing shareholders may be reduced.
In addition, new equity securities or convertible debt securities
could have rights, preferences, and privileges senior to those of
Equinix’s current shareholders, which could substantially decrease the
value of Equinix’s securities owned by them. Depending on the share
price Equinix is able to obtain, it may have to sell a significant
number of shares in order to raise the capital it deems necessary to
execute its long-term strategy. Equinix’s shareholders may experience
dilution in the value of their shares as a result.
Equinix’s forward-looking statements should not be relied upon except
as statements of Equinix’s present intentions and of Equinix’s present
expectations, which may or may not occur. Cautionary statements should
be read as being applicable to all forward-looking statements wherever
they appear. Except as required by law, Equinix undertakes no obligation
to release publicly the result of any revision to these forward-looking
statements that may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers
are also urged to carefully review and consider the various disclosures
Equinix has made in its filings with the Securities and Exchange
Commission. In particular, see Equinix’s recent quarterly and annual
reports filed with the Securities and Exchange Commission, copies of
which are available upon request from Equinix. Equinix does not assume
any obligation to update the forward-looking information contained in
this press release.
Equinix and IBX are registered trademarks of Equinix, Inc.
International Business Exchange is a trademark of Equinix, Inc.
