Telstra, CyberWorks Launch Ventures in Three Key Areas
February 8, 2001
Tech Center
Telstra, CyberWorks Launch
Ventures in Three Key Areas
By H. ASHER BOLANDE
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Australia's Telstra Corp. and Pacific Century CyberWorks Ltd. of Hong Kong formally launched a pan-Asian alliance by completing a multibillion dollar cash-and-asset swap to create new companies pooling their assets in three key areas: international fiber-optic networks, mobile telecommunications services, and data centers.
Now the hard work begins for the trio of joint ventures, which face heavy competition and, in some cases, uncertain prospects amid a market environment rapidly being transformed by technological convergence. The offspring of the two telecommunications companies that each dominate their respective home markets will be up and running from today.
Wednesday's transactions included Telstra's purchase of a US$750 million convertible bond in CyberWorks, which is headed by 34-year-old Hong Kong magnate Richard Li. That combined with $2.43 billion the Australian operator paid in cash will relieve financial pressure on CyberWorks that stems from its pricey takeover of Cable & Wireless HKT Ltd. last year. Telstra, for its part, faces declining revenue in its home market, and is counting on the alliance to bolster its Asian expansion plans.
The biggest of the ventures, a 50-50 Internet protocol backbone operator to be known as Reach Ltd., makes its debut as the sector is poised for unprecedented increases in capacity this year -- and, most analysts say, corresponding drops in prices.
According to estimates from Nomura International (Hong Kong) Ltd., fast-improving optical-data technology coupled with a boom of undersea fiber-optic cable construction in Asia is set to boost available capacity from 64 gigabits to 904 gigabits a second in 2001. Nomura expects that figure to more than double again the following year.
That translates into a situation where supply outstrips demand by hundreds of times, and uncertainty about when that demand will grow to match capacity has withered the credit ratings of other international Internet protocol infrastructure "pure plays" like Asia Global Crossing Ltd. in recent months.
Although there was talk of listing the Internet protocol venture on the stock market when Telstra and CyberWorks first outlined their alliance last year, analysts have all but ruled out an IPO this year because investors have lost their appetite for such companies.
Still, the new venture will need funds to expand its undersea fiber network because Reach lacks the giant-capacity pipes to North America and Europe being set up by other players, analysts say.
While Telstra and CyberWorks are big wholesalers of voice, data and Internet connectivity in Asia with a network that links more than 14 countries "the problem is there isn't high capacity in any of those lines," said a Hong Kong-based analyst with a U.S. investment bank. CyberWorks has told investors that the ability to upgrade existing lines is limited, he added.
Gerry Moriarty, Telstra's group managing director for wholesale and infrastructure, Wednesday played down the urgency of raising cash, predicting capital expenditures initially would amount to 10% to 15% of the venture's revenue. "It's very capable of funding that and producing quite attractive profits," he told reporters in a teleconference call without elaborating. Telstra and CyberWorks estimate the venture will have annual revenue of $1.9 billion from the start.
Wednesday, Alistair Grieve, the former chief operating officer of Malaysia's Maxis Communications Bhd., was named Reach's chief executive, while Mr. Moriarty will serve as chairman.
The Internet data-center company, a start-up yet to be named, aims to benefit from the Internet protocol backbone network but likewise faces heavy competition, analysts say.
The new wireless company, which is 60% owned by Telstra, absorbs Hong Kong's No 2 mobile carrier and is aimed at creating a regionwide franchise in cell-phone services. Like Internet protocol backbones, wireless is a sector with heavy capital expenditure requirements and some uncertainty about demand growth -- especially in the arena of data services under coming third-generation networks.
First proposed in April last year -- when CyberWorks' shares were riding high at the peak of the dot-com boom -- the alliance had to be modified after technology stocks hit the wall, with final terms announced in October relatively favorable to Telstra.
Write to</HIGHLIGHT> H. Asher Bolande at hyam.bolande@awsj.com1.
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