By Dana Cimilluca, David Benoit and Dana Mattioli 

Rackspace Hosting Inc. is nearing a sale to a private-equity firm, two years after the cloud-computing company said it would explore a deal amid heightened competition in the fast-growing market.

The San Antonio-based company is in advanced talks with one or more private-equity firms, and a deal could be reached as soon as this week, according to people familiar with the matter.

Rackspace had a market value of $3 billion on Thursday afternoon before The Wall Street Journal reported on the possible sale, meaning that with a typical takeover premium, the company could be valued at as much as $4 billion.

Rackspace is a provider of cloud services, which allow users to tap remote servers for storage and expanded computing power and have exploded amid the surge in mobile usage. The company has shifted its business model in recent years, amid stiff competition from larger technology companies such as Amazon.com Inc. and Microsoft Corp., and is now more of a services provider offering bundled computing and support.

In 2014, the company said it had hired bankers to help evaluate expressions of interest. Later that year, Blue Harbour Group LP disclosed a sizable stake in Rackspace.

Today, the activist investor is among the company's largest shareholders, with a stake of more than 9%.

At $4 billion, the company would still be valued well below what it was worth just a few years ago. Rackspace shares traded at about $31.50 each after hours, after surging more than 30% on the report. In early 2013, they changed hands at nearly $80.

Last year, Rackspace and Amazon, once fierce rivals, unveiled a partnership in which Rackspace would help make it easier for corporate customers to move computing operations from their own facilities to Amazon Web Services, the web-retailing giant's cloud platform. Rackspace also has a similar partnership with Microsoft.

Amazon Web Services has been growing at a blistering pace, registering a 58% year-over-year revenue gain to $2.89 billion in the most recent quarter, the company said last week. The unit appears on track to exceed Amazon Chief Executive Jeff Bezos's goal of reaching $10 billion in sales this year. The business is a key pillar of Amazon's growth and has become the go-to provider for startups, many government agencies and some large corporations.

A partnership between Rackspace and Amazon would have been unthinkable just a few years earlier, but in early 2014, Rackspace, facing ever slimmer margins amid a cloud-computing price war, withdrew from head-to-head competition with Amazon. Since then, its focus on offering higher-margin services has helped boost the company's cash flow from operations -- a metric private-equity firms closely follow and which hit $156 million in the first quarter. Last year, Rackspace had $122.4 million of net income on revenue of $2 billion, increases of nearly 14% and 12%, respectively.

The company is expected to report second-quarter results Monday.

The idea for Rackspace began in 1998 by three college classmates, according to the company's website.

Technology has been the most active sector for deal making so far in this year. There have been more than $404 billion of deals in the industry, representing about one-fifth of overall deal flow, according to Dealogic.

Last month, Oracle Corp. agreed to buy NetSuite Inc. for $9.3 billion. In June, Microsoft Corp. agreed to buy professional social network LinkedIn Corp. for $26.2 billion.

--Matt Jarzemsky contributed to this article.

Write to David Benoit at david.benoit@wsj.com and Dana Mattioli at dana.mattioli@wsj.com

 

(END) Dow Jones Newswires

August 05, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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