Singapore Telecommunications (Singtel) Z74 2.07% has agreed to sell 20% of its regional data centre business to global investment firm KKR.

The stake will be acquired through a fund managed by Kohlberg Kravis Roberts & Co. L.P. (KKR) where it will commit up to $1.1 billion in cash.

The investment puts the enterprise value of Singtel’s overall regional data centre business at $5.5 billion, around 60% higher than the $3.4 billion estimate by DBS Group Research.

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KKR will have the option to increase its stake to 25% by 2027 at the pre-agreed valuation.

This is the first collaboration between Singtel and KKR. According to the telco, it will be able to tap on KKR’s expertise investing in data centres and telecommunication infrastructure globally in addition to capital. KKR itself is making this investment as part of its Asia infrastructure strategy.

The proceeds from the transaction will go towards the expansion of the regional data centre business across Asean markets including Singapore, Indonesia and Thailand. It will also go towards exploring markets like Malaysia and others.

Singtel’s regional data centre business is part of the Digital InfraCo unit which was formed in June. The telco is one of the largest data centre operators in Singapore.

In addition to 62MW of existing capacity in Singapore, Singtel is building a new 58MW DC Tuas in Singapore and has also partnered Telkom and Medco Power in Indonesia and GULF and AIS in Thailand to develop data centres in Batam and Bangkok respectively. The data centre portfolio will deliver a total combined capacity of over 155MW once the three new projects are operational in 2025, with room to scale up to more than 200MW.

“KKR's investment underscores the quality of our data centre portfolio and confidence in our plans to scale the business by capitalising on the digitalisation and rapid AI adoption that is transforming this region. Our expertise in designing, building and operating data centres, and our connectivity leadership in the region, together with KKR's strong track record in supporting digital infrastructure assets and its platform-building expertise makes for a powerful combination. We look forward to building on the strong momentum we have achieved to grow the business into one of the region's leading green and sustainable data centre platforms with rich hyper-connectivity services,” says Bill Chang, CEO of Singtel’s Digital InfraCo.

“The data centre industry is growing at an accelerated pace given the unprecedented industry trends we are witnessing. KKR is a highly credible partner in the data centre space and we look forward to our strategic partnership in scaling up the platform to become a meaningful growth engine for Singtel. The investment by KKR crystallises the latent value of our data centre assets and we hope this illuminates value for our shareholders in the coming months. With more than $6 billion being unlocked since we embarked on our strategic reset two years ago, we continue to focus on unlocking value for our shareholders,” says Arthur Lang, group CFO at Singtel.

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“We are pleased to provide this tailored solution to support the regional data centre platform of Singtel, one of the most longstanding and distinguished corporations in Singapore and a leading digital infrastructure provider in Asia Pacific. Robust digital infrastructure, including high-quality data centres, will play a crucial role in enabling Southeast Asia’s flourishing digital economy, and Singapore is well-placed to serve as a central hub for the region. We look forward to working closely with Bill, Arthur and Singtel’s talented team to meet this tremendous demand, and sharing our global expertise and network to accelerate the platform’s growth across the region,” says David Luboff, partner and head of Asia Pacific Infrastructure at KKR.

The data centre market in Southeast Asia is expected to grow by 17% over the next five years compared to 12% for the rest of the world. Some US$9 billion ($12.27 billion) to US$13 billion in investments is projected to flow into the region.

According to Singtel, demand for data centres is expected to outpace supply due to higher data consumption, enterprises transitioning to the cloud and the rapid rise of artificial intelligence (AI) in the region.

Malaysia, Indonesia and Thailand could see the biggest increase in capacity with Johor, in particular, benefitting from spill-over demand from Singapore due to the island state’s supply constraints. The growing need to handle high performance computing tasks such as generative AI will also spur a significant growth in graphics processing units (GPU)-powered data centres in the years to come.

The unaudited net assets of Singtel's regional data centre business as of June 30 was approximately $19 million.

The transaction is expected to be completed by the fourth quarter of 2023.