Telstra's Pacnet pay-off

Guaranteed a series of Alan Bond moments, cash-rich Telstra's latest buy could secure it pole position in some of the world’s most promising growth markets.

Last year Telstra chief executive David Thodey proved Kerry Packer’s famous adage "you only get one Alan Bond in your lifetime” wrong. In settling its National Broadband Network (NBN) negotiations with a healthy slice of the troubled project’s design and construction works alongside its $11 billion dollar infrastructure deal, Telstra now has a modern river of gold that cements the company’s dominance of the local market.

With only seven per cent of its revenues coming from international operations, Telstra can now look overseas for long term growth. The company’s planned acquisition of pan-Asian telecommunications service provider Pacnet announced just before Christmas is a major step in finding that offshore growth Telstra needs but has eluded the company to date.

Pacnet, best known in Australia for its scooping up a range of local Internet Service Providers (ISPs) in the early 2000s, is an interesting company built out of the smoking tech wreck ruins of Global Crossing Asia at the beginning of the century. Part of its unique structure are the company’s dual head offices in Hong Kong and Singapore, something that Pacnet boss Carl Grivner put down to the business’ history in an interview with Technology Spectator last year.

“It was more accidental than magical or anything else,” Grivens explained. “The original headquarters of the company when it was created twelve years ago was in Hong Kong. As the management team evolved some were based in Singapore. Now senior management is split between Hong Kong and Singapore.”

While the management were split in East Asia, the company’s private equity owners are British and US based funds who had been disappointed with Pacnet’s returns and have been looking at offloading Pacnet to Pacific Basin telcos for some time -- Telekom Indonesia was rumoured to be looking at the company in 2012 but that deal apparently ended in disagreements between investor and management.

Rating agency concerns

The company was downgraded by Moody’s Investor Services to a lowly B3 rating last October with the rating agency concerned about the $400 million dollars of the debt Pacnet accumulated in laying a network of subsea cable links stretching from California to Singapore along with building data centres scattered across East and South Asia. Last December the company reportedly had a $20 million interest payments due with just $30 million in cash available.

While underperforming, Pacnet has some valuable assets -- a North Pacific connection between California and Japan, another cable network running between South Korea and Singapore with connections to Hong Kong, ChinaJapan, Taiwan and the Philippines along with 19 data centres dotted between South Korea and India, including five in mainland China.

Pacnet CEO Grivens described the company’s strategy in China with emerging regions like South West China’s Chongqing and Tianjin as being key to the company’s long term ambitions. “A lot of people want to do business in China and having those physical assets are important as you need licenses to operate,” he said. “The interest we are getting is from enterprise customers who want to have a presence in those markets.”

“China is not one area, each region is different and each operates differently.” Grivens said of doing business in the People’s Republic. “I think that’s exciting because I think the competitiveness within China creates something unique on a global basis.”

Understanding East Asia

Should the various national regulators approve the transaction, understanding China’s complex regional economies could prove to the greatest asset Pacnet brings to Telstra. “What differentiates us are the people we have in each of those locations.” Grivens says, “because when you do business in Singapore versus Sydney verus Hong Kong everything’s a little bit different or a lot different. The people who know how to do things in each of our markets is what makes us unique.”

Being unique, and not particularly profitable, has proved to be Pacnet’s undoing and it may well need Telstra’s deep pockets to complete a long term investment in the region’s telecommunications infrastructure. Whether Telstra can make a similar return in East Asia as it will on the new NBN rivers of gold running through its domestic operations, will be something the company’s shareholders will be watching closely.

In the early 1990s, Kerry Packer’s Alan Bond moment gave him Channel Nine and a war chest that allowed the media tycoon to invest in Foxtel giving Packer a box seat position in the restructuring of the Australian media industry. Should Telstra be successful with its Pacnet investment, it may have bought the Australian telco a seat in a far bigger, and lucrative, industry shake-up across East Asia.

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