Meritage Establishes Digital Fortress

Digital FortressWe’re excited to announce we’ve formed a new company, Digital Fortress, which will serve as a platform for consolidating the data center colocation market in the Pacific Northwest and for the development and refurbishment of select new data center sites. The Company is headquartered in Seattle, WA and will be led by Mark Hughes, former CFO of our portfolio company Inflow Communications and a Meritage Entrepreneurs Fund investor.

We’ve been pursuing investment opportunities in the data center space since the sale of Inflow in 2005. Most recently, since the formation of Fund III, we’ve been proactively searching for an entry point into the segment. Valuations in the space have exceeded our sensibilities keeping us on the sidelines. Through the formation of Digital Fortress we’ve created a unique and compelling entry-point into the segment.

Our evaluation of the Seattle market dates back to October 2010, culminating with Meritage signing letters of intent to acquire digital.forest, Inc. and the assets of Fortress Colocation Services during June 2011. We launch Digital Fortress with the simultaneous completion of these two acquisitions and the announcement of plans to refurbish an existing enterprise data center space in downtown Seattle. The operations of the two initial acquisition targets are located in the same building on Sabey Corporation’s Intergate.West data center campus located ten miles south of Seattle, WA. Both targets serve large and mid-sized enterprise customers with traditional colocation services, and differentiate their offerings by delivering high-density power capabilities. Under Mark Hughes leadership, the operations of these facilities are being combined under the umbrella of a single operating model, preserving and enhancing the value proposition in the process.

The Company will simultaneously expand its operating footprint through the refurbishment of an existing enterprise data center in downtown Seattle. The new facility will offer 18,000 square feet of data center colocation space. In total, the Company will operate in excess of 40,000 usable square feet of data center.

The colocation market remains a regional business. Seattle and the Pacific Northwest are considered by industry experts like Tier1 Research to be amongst the most attractive markets for data center operators in North America. Seattle, in particular, is blessed. Data center supply in metropolitan Seattle is already constrained. And because the future rate of demand growth is expected to exceed the rate of supply growth, available capacity will continue to be in short supply. In addition, Seattle has some natural advantages over other metropolitan markets, including a cool climate and access to low-cost power. More than 90% of the power used by Digital Fortress’ facilities is generated from renewable sources, principally hydroelectric generation.

Meritage led the structuring and equity syndication of this investment, resulting in equity commitments from Halyard Capital and Sweetwater Capital, both of whom we’ve invested with previously. Halyard Capital was a co-investor in Inflow Communications and Sweetwater Capital, led by Bill Marraccini, was a co-investor in our already successfully liquidated Fund III portfolio company NewPath Networks.

We’re excited to have led this transaction and about Digital Fortress’ prospects. David Solomon and Derek Pilling will represent Meritage on the Company’s Board of Directors. We look forward to working with Mark Hughes, the management team, and our co-investors to make Digital Fortress a success.