Data center colocation provider Cyxtera files for bankruptcy

Colocation provider Cyxtera Technologies has filed for Chapter 11 bankruptcy after spending the last few months trying to find a buyer or reduce its debt load. The company will now attempt to restructure through bankruptcy, or perhaps a suitor will come along to buy out the company.

“Cyxtera expects to use the Chapter 11 process to strengthen the Company’s financial position, meaningfully deleverage its balance sheet and facilitate the business’s long-term success,” the company said in a statement.

Cyxtera is not exactly a small fry. It reported $746 million in business last year although due to high operating expenses still lost money. It has 60 locations around the world and the more than 2,300 customers. The company was formed in 2016 when a team of investors bought out the data center business of CenturyLink for $2.15 billion.

Cyxtera says it will continue to operate its data centers as normal and nothing will change for its customers. Customers will still have access to their data center sites.

How does a company doing this much business, with this many customers, still managed to go bankrupt in one of the hottest markets on the planet? It all comes down to bad management and high debt, which Cyxtera had plenty of both.

In its most recent 10K filing with the SEC, the company said “We had a net loss of $355.1 million for the year ended December 31, 2022, and had an accumulated deficit of $1,576.5 million as of December 31, 2022. We have never been profitable and do not expect to generate positive net income until at least 2030.” To add insult to injury its stock collapsed from a high of $14 per share a few months ago to just six cents.

Why wasn’t it profitable? Because of high operating expenses. Of its 60 locations, 21 are leased from other data center providers, including 15 from Digital Reality Trust. That could be why the company couldn’t find a buyer. Despite a red-hot M&A market for data centers, no one snapped up Cyxtera after months of shopping, perhaps because of all of its leases and debt.

The leases, says Bill Kleyman, independent consultant to data center companies, is where there is potential risk exposure is for customers.

“The horrible rabbit hole here is that if the people that are in charge with the bankruptcy proceedings come back and they say you need to terminate these leases now. If there are hosted workloads in [leased data centers], they’re gonna have to figure out a way to migrate those or to move them during this bankruptcy process,” he said.

But he added that is a worst case scenario and in those situations, it’s not like a like a hard pull of a plug. There would be an orderly migration process. “The good news for general customers is that [Cyxtera is] not going to go away. I think they’re going to continue to support their customers,” he said.

Kleyman believes that once Cyxtera goes through a restructuring, it is either going to come out financially healthier, or it’s going to find a buyer that wants its assets and/or acquire its customer base.

“For customers specifically, their stuff isn’t going to get shut down. They’re not going to experience any sort of disruption. These facilities are still very, very high quality, high class facilities,” he said.