Nov 03,2000
Asia Global Crossing Leads,
But in How Solid a Market?
By Jason Booth
Staff Reporter of The Wall Street Journal
HONG KONG -- John Legere, the chief executive of Asia Global Crossing , exudes confidence. But is he too self-assured?
His company's initial public offering last month on the Nasdaq Stock Market was poorly received, the price being cut to get it out the door. And the yield on the US$400 million note the company just issued was ratcheted up to 13.75%, deep in junk-bond territory.
Despite the market's doubts, Mr. Legere is convinced his company will win the battle for dominance in Asia's undersea fiber-optic cable market. "If you were to rate where our competitors are in Asia, they are pretty far behind," he says.
That may well be, but there are doubts about how profitable this market will be in the long run. Indeed, over the next few years, the price that Asia Global Crossing will be able to charge customers to use its cables is expected to plunge.
In the past year, prices have fallen 70% on cable routes between the U.S. and the United Kingdom as more and more capacity comes on line. Similar declines are anticipated in Asia. Even Mr. Legere admits that by a "conservative" estimate, prices will fall 30% a year over the next few years.
"There really is not enough demand to fill up all the pipes that are coming in," says To Chee-eng, Internet protocol infrastructure analyst at Gartner Group. "Supply will start to outstrip demand by the end of 2001. And when that happens, prices will drop dramatically."
Those prices, and Asia Global Crossing's role in setting them, will be closely watched, because its business is also the business of a number of Asia's biggest names in telecommunications, such as Pacific Century CyberWorks Singapore Telecommunications . Indeed, earlier this week, Singapore Telecom announced that it plans to lay undersea fiber-optic cable between the city and India.
What Mr. Legere sees as his company's saving grace is timing. The company completed the first leg of its Asia network, Pacific Crossing 1 (PC-1), linking Japan and the U.S. in December. Having gotten an early start, Mr. Legere believes, his company will be able to make enough money to cover the cost of construction before prices fall too far.
"I sold 3% of capacity on PC-1 [as of June] and returned 18% of its cost." says Mr. Legere. "I could pay back the cost of the system by 2003 or even before and could have used as little as 25% of capacity because I'm paying back at prices that are two or three times higher than they will be in a couple of years."
But while PC-1 is up and running during this economic sweet spot, the later stages of the network will be lit up when prices may well be on the slide.
The first section of Asia Global Crossing's newest network, East Asia Crossing, will link Hong Kong to Japan by the middle of 2001. That's at about the same time that archrival Level 3 will also complete a system linking Japan and Hong Kong. Brokerage house Jardine Fleming cites estimates by "industry sources" that bandwidth costs on this route could drop by 85% next year.
Mr. Legere said his company is hoping to finalize joint ventures with telecommunications company Dacom in South Korea and Microelectronics Technology in Taiwan by the end of this year, which would add those countries to the network in the middle of 2001.
Another leg of Asia Global Crossing's system, which will bring Singapore, Malaysia and the Philippines into the network, is scheduled to be completed by the end of next year.
All together, the network will cost more than US$2.5 billion to build, according to the company's prospectus. Mr. Legere said the construction costs are fully funded, through shareholder equity provided by the parent company, the IPO and the bond issue. The company would be compelled to raise more capital if it decides to expand the network, he says.
Analysts have expressed hope that Asia Global Crossing will in time reduce its dependence on the undersea cable business by expanding into higher-margin businesses such as data centers and Web hosting. Yet according to Mr. Legere, undersea cables will continue to provide nearly all the company's revenue in the future.
The company currently has minority stakes in land-based networks in Hong Kong (with Hutchison Whampoa) and Japan that provide the so-called last mile linking to individual customers and provide services such as Web hosting and data storage. Yet because they are minority stakes, profits from those operations won't show up on Asia Global Crossing's profit/loss statement.
Mr. Legere says taking majority stakes in joint ventures or setting up independent operations on land isn't currently part of his company's plans. He does make the point, however, that it is those joint ventures that will be a key source of customers for the undersea cable business in the future.
"The Web-hosting operations will be valuable traffic-gathering centers for us," he predicts.
For those looking to invest in Asia Global Crossing, possibly the best benchmark is its parent, Global Crossing , headquartered in Los Angeles. Since February, the parent's stock price has fallen 60%. Investors have been unnerved by a decline in the company's revenues and widening losses. While the company blames the fall in revenues on a change in the way sales are booked, the sharp decline in capacity prices across the Atlantic haven't helped confidence levels. The company has also seen a disquieting amount of turnover among senior management. The company has had three CEOs in the last year.
Profit at Asia Global Crossing, in which Microsoft Softbank each own 15.4% of the shares, are even more distant. Mr. Legere says the company will be "cash-flow positive," meaning that more money is coming into the company than going out, by the end of 2002, though he didn't predict when the company will turn a profit.
As for CEO turnover, Asia Global Crossing appears intent on keeping Mr. Legere in his job, at least until 2003. It has given him a US$15 million interest-free loan, which he won't have to repay if he stays on until February 2003. And the former AT&T and Dell executive will receive options to acquire 25 million company shares, with an exercise price of US$7, which is the IPO price and roughly the current trading price.
Write to Jason Booth at jason.booth@awsj.com
Estimated total submarine cable capacity, in gigabites per second, before capacity upgrades:
Source: Indosuez W.I. Carr Securities |
