here's some more of Salomon Smith Barney's Grub report today. (laws against posting the whole thing)
~ January 18, 2000
01/18/00 Global Crossing Ltd. (GBLX $51.18,1-S,Tgt $70.00) Jack B. Grub
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Tyco has announced that it will stop building and maintaining subsea
fiber systems for other folks and instead actually build a subsea system
for itself which it will operate as a carrier's carrier. Tyco will honor
existing new build and maintenance contracts, in particular, for Level 3,
Hybernia, Telefonica, and GBLX. Tyco will also honor contracts with BT
for a north-south Asia route and Telstra for an Australia-Japan route.
Tyco is planning on building a global subsea system which will span the
Atlantic go down the Atlantic alongside Europe and cut across the
Mediterranean, have a Baltic ring as well as a Pacific ring (see table
below).
NETWORK BUILDOUT PROFILE
System Build Used in the TSSL View
System Name Yr of RFPA Description
US-UK Ring 2001 New York to London
Big Pac Ring 2002 Seattle to Tokyo to Guam to Hawaii to LA
Hong Kong-Guam 2002 Hong Kong to Guam
UK-SP-PT-UK 2002 London to Madrid to Lisbon
PT-SP-IT-PT 2002 Lisbon to Barcelona to Rome to Sicily
Italy-Israel Ring 2002 Sicily to Athens to Marmaris(Turkey) to
Tel Aviv to Alexandria(Egypt)
Baltic Ring 2002 Hamburg to Copenhagen to Stockholm to
Helsinki
to St. Petersburg to Gdansk
UK-FR 2002 London to Paris
UK-Germany 2002 London to Hamburg
The planned network will have 64 wavelengths or windows with an OC-192
backbone and 4 fiber pairs resulting in a 2 1/2 terabit total capacity.
The network will have 25 landing sites and 19 telehouses where Tyco will
do co-location and other services. As far as terrestrial backbone is
concerned, we expect Tyco through accommodation of rights of ways
dark-fiber purchases, IRUs and swaps will stitch together terrestrial
backbones that connect to the subsea system. This entire project should
be done by end of 2002 (with the US-UK Atlantic ring done in
2001)--meaning Tyco will be operational for the full-year 2003. We
expect Tyco to initially be a carrier's carrier with its customers being
telecom carriers around the world, ASPs, ISPs, companies such as network
caching companies and web-hosters and potentially some high-end corporate
applications.
RAMIFICATIONS OF THIS HUGELY POSITIVELY FOR GLOBAL CROSSING
We view this move by Tyco as massively positive for GBLX for several
reasons:
1) Tyco is the ultimate insider in that they are the leading builders of
subsea systems and as such, has a very good read on the demand forecast
for capacity. The fact that they are exiting their own business (which
they were very good at) to go into the business of operating a subsea
network tells you something about their view of how great the business
is. As a corollary to this, it is clear that Tyco fundamentally believes
that demand for bandwidth, especially on subsea routes, will continue to
be explosive since it will not be until 2003, that Tyco really is up and
running. Thus, this clearly underscores the demand potential for GBLX as
well as underscores the notion that the price-demand relationship will
continue to be a positive one for carriers. Specifically, given the
declining cost/price nature of the business, by the time Tyco is fully
operational, price points for STM1s will be one-tenth of what they were
in 1998. Yet, Tyco believes (as we do also) that they will get a great
return or investment. This is because demand for subsea bandwidth is
doubling every year with capacity sales migrating upward from STM1s to
STM64s to complete wavelengths. Moreover, network businesses are
extremely leverageable with very high incremental ROIs.
2) Tyco, being one of the 2 leading builders of subsea systems along with
Alcatel, is now taking themselves out of the supply chain outside of the
existing contracts they will honor. Thus, any Tom, Dick and Harry who is
running around with a business plan trying to get financing for a subsea
system (of which there are many of these initiatives) will have a very
difficult time getting financing since there will be nobody to build a
system (we doubt that Alcatel could handle all of the potential demand
for subsea systems). Thus, from a GBLX perspective, even with the Tyco
network coming on board in 2003, the fact is a major source of supply has
been eliminated.
3) Finally, GBLX continues to be much more commercially-oriented and by
2003, it is clear that the majority of their revenues will be coming from
commercial customers rather that carrier customers. Thus, just like what
happened in other market segments in telecom, voids get left that others
fill. In this instance, we think Tyco will be in a perfect position to
fill the void of a carrier's carrier of subsea capacity that will be left
largely by GBLX which by 2003 will be a much more commercially-oriented
enterprise.
It also should be noted that GBLX bought the global marine part of Cable
and Wireless which means GBLX has their own ships for in-house
maintenance thus, are not at all vulnerable to Tyco being out of the
market for maintaining subsea systems.
The bottom line is Tyco is an extremely smart company, is the leading
builder of subsea systems, is the ultimate insider in terms of being
privy to demand forecast and they decided at this stage that it makes
sense to go into the business of running subsea network (which we believe
will result in tremendous value creation for Tyco). Tyco realizes that
there are 50 terrestoral networks operating or being built worldwide to
go along with thousands of ASPs, ISPs, etc. developing applications which
will drive bandwidth demand. This is in contrast to 17 proposed subsea
systems of which only 8 are actually under way and given the nature of
the beast, no subsea system can approach the ultimate capacity of a
terrestoral system (subsea systems have 4-8 fiber pairs versus 144 for
terrestoral and subsea systems will never carry as many wavelengths as
terrestoral networks). Thus, capacity in subsea networks will lag demand
even to a greater degree than supply lags demand on terrestoral
networks. This is a tremendous endorsement of GBLX and competitively, we
believe, that GBLX is far better off with a Tyco running a carrier's
carrier system in 2003 than they would have been if Tyco was there to
supply everybody who wanted to build a subsea system.
NET/NET: We continue to view GBLX as having one of the best set of assets
anywhere in the world of telecom. Their core business of running a
subsea network has been reinforced by a very smart insider and we
reiterate our $70 Price Target. |
