Rackspace Sheds Website Hosting Business as Sale Rumors Persist

The cloud services provider is selling its Cloud Site business to Liquid Web, while officials decline to speculate on rumors that it is being sold.

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Rackspace Hosting has sold its website hosting business amid speculation that the entire company could be sold.

Rackspace, which grew fast in the early years in part on the strength of its business hosting websites for companies, this week announced it had sold its Cloud Site unit to Liquid Web, a $90 million web hosting and cloud services provider that is planning to augment its existing offerings with the Rackspace platform.

"Unfortunately, our industry is trending toward unsupported services, which leaves fast-growing developers, digital agencies and designers alone, without a real person to turn to when they really need help," Liquid Web CEO Jim Geiger said in a statement. "However, at Liquid Web, day-in and day-out our people stand behind the creators of content and commerce and we're going to continue to stand behind those businesses who rely on the web and cloud."

Liquid Web officials said the plan for Cloud Sites is to grow it as a scalable all-in-one technology platform for high-traffic websites that will complement the company's existing portfolio and expand what development environments Liquid Web can support, including WordPress, Drupal, Joomla, .NET and PHP. The Cloud Site business will remain in San Antonio, Texas—Liquid Press is headquartered in Lansing, Mich.—and will grow Liquid Web's workforce to about 550 people and customer base to 30,000 worldwide.

No financial details about the sale were released.

The deal also will allow Rackspace officials to put more focus on its cloud efforts, including offering managed services to enterprises running all or parts of their businesses on public clouds like Amazon Web Services (AWS) and Microsoft Azure and on OpenStack-based private clouds. In a conference call with analysts and journalists to discuss the company's most recent quarterly financial numbers, President and CEO Taylor Rhodes said the AWS efforts have been particularly strong, with the company signing 277 customers since the service launched in October 2015, and Rackspace is looking to leverage is large existing customer base to grow the AWS managed services business.

"In our Cloud Sites business, it runs several hundred thousand websites for its customers and it competes in a market that if we wanted to really focus there, we'd have to make some substantial investment," Rhodes said, according to a transcript on Seeking Alpha. "Instead, what we've been able to do is find a strategic buyer in Liquid Web, who will buy the company at a higher multiple than it was producing for us and allow us to both focus our portfolio, as well as find a happy home for that business and help us raise some incremental funds that we can invest in growth."

That investment in growth will be important for the company, which has transitioned into more of a cloud services provider and has struggled in an increasingly competitive cloud computing space that includes such heavyweights as AWS, Microsoft and IBM and a range of smaller businesses looking to carve out a place for themselves in the market.

Rackspace officials in May 2014 hired financial services firms to help them map out options for the company's future, including a possible sale to a third-party. Several months later, the officials said they had completed the evaluation and decided to push forward as an independent company rather than seeking a sale, and put Taylor in place as president and CEO.

However, speculation continued that Rackspace would be sold, with new reports surfacing earlier this month that a private equity firm was negotiating to buy the company. Reuters, citing unnamed sources, reported that Apollo Global Management was in talks to buy Rackspace for more than $3.5 billion. The Wall Street Journal reported that one or more private equity firms were in advanced talks for the company.

During the company's quarterly financial conference call Aug. 8, Rhodes declined to comment on the reports, which he called "rumors and speculation."

For the quarter, Rackspace saw revenue grow 7.2 percent, to $524 million, and profits climb 26 percent, to about $35 million. However, officials said they expect revenue for the current quarter to hit $510 million to $515 million, and lowered projections for revenue for the year to $2.06 billion to $2.08 billion, a drop from early expectations of $2.08 billion to $2.16 billion.