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Rackspace IPO Recap: Multi-Cloud MSP’s Initial Public Offering Disappoints

Rackspace Technology‘s IPO (initial public offering) surfaced today (Wednesday, August 5) but investors didn’t appear impressed. Indeed, Rackspace shares ($RXT) were priced at $21 on August 4, but opened at $16.85 and were trading at $16.18 as of 3:08 p.m. ET on August 5, according to SeekingAlpha.

So what went wrong? On the one hand, Rackspace over the past four years or so has transformed into a respected multi-cloud MSP focused on Amazon Web Services (AWS), Microsoft Azure, Google Cloud Platform (GCP) and more.

But on the other hand, some of Rackspace’s recent growth leaned heavily on M&A deals and supporting those big name third-party clouds. Read between the lines, and Rackspace has some of its own IP — but the MSP depends heavily on third party public clouds for growth. Moreover, Rackspace has also carried considerable debt under private equity firm Apollo Global Management‘s ownership.

Rackspace IPO: Why Private Equity Firms and MSPs Were  Watching

Private equity firms and platform MSPs (managed IT service providers) worldwide were watching today’s IPO closely to help value their own businesses and MSP investments.

Ahead of the IPO, Rackspace’s potential valuation math looked like this:

  • Rackspace’s adjusted EBITDA was $742.8 million in 2019 compared to $815.8 million in 2018 and $773.5 million in 2017.
  • The average of those three figures is $777 million in annual adjusted EBITDA over the past three years.
  • At 7X to 12X of that average annual EBITDA, that amounts to an overall Rackspace valuation of $5.44 billion to $9.32 billion — or just short of the $10 billion valuation that Rackspace investors suggested privately back in 2018.

Admittedly, ChannelE2E has offered up a wide valuation range for consideration. But the rough numbers suggest Rackspace will need to achieve a lofty 13X adjusted EBITDA to hit that $10 billion valuation mark.

Assuming a successful IPO had climbed to the midpoint of the originally proposed price range, the company’s enterprise value at IPO would have been approximate $8.3 billion, The Street reports. But the actual IPO price — targeted at $21 per share — was a bit below that valuation. And now, shares are at the sub-$17 level as the opening day of trading nears a close.

Rackspace IPO: More Details

Apollo Global Management acquired Rackspace Hosting for $4.3 billion in 2016 and took the business private.

After multiple acquisitions coupled with organic growth, the hosting company has evolved into Rackspace Technology — a multi-cloud MSP that supports AWS, GCP, Azure and plenty of additional cloud and security services.

Apollo will continue to own 65.1 percent of Rackspace following the IPO, according to the SEC filing.

Meanwhile, numerous private equity firms have acquired platform MSPs in recent years. The “platform” designation typically means the MSP is larger enough or specialized enough to service as a foundation for additional tuck-in MSP acquisitions.

Private Equity: MSP Mergers, Acquisitions and Investments

Dozens of private equity firms have made MSP acquisitions and related investments so far in 2020 include. A complete list of deals involving PE firms and MSPs is here.

No doubt, many of those investors and MSP owners will be watching the Rackspace IPO closely — striving to pinpoint the latest market valuation information for large-scale MSPs.

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3 Comments

Comments

    cyrus maghami:

    They should be getting a much higher value than 7-12x given their size/scale, and based on public comparables. Wouldn’t be surprised if they pop to 15-20x on opening day

    Joe Panettieri:

    The pop didn’t happen, though I continue to respect the multi-cloud MSP focus.
    -jp

    cyrus maghami:

    Trading even lower today!

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