Reclaiming Lost Ground
Lalou Ramos, 2-Jul-2001
No other telco in Asia has received such a mauling from the media as has Pacific Century CyberWorks (PCCW) . Since PCCW concluded what was arguably the biggest merger in Asia when it took over 130-year old Hong Kong Telecom (Cable & Wireless HKT) last year, the company has had to deal with public scrutiny over not just the scholastic credentials of its CEO, Richard Li, but the way the company distributes key posts in its newly-formed joint venture with Telstra , with the implication that it might have given the Australian carrier control over some of its most profitable businesses.
Now, Li is said to be stepping down from the CEO position and the company is keeping mum on when the new chief will be announced and whether he will be an insider or a seasoned foreign telecoms executive. PCCW, however, does not take a passive attitude on allegations of lack of operational experience. Alex Arena, deputy chairman, Executive Committee, PCCW, tells tele.com asian edition why shareholders should put a little more faith in PCCW as it reclaims lost ground and makes careful steps in becoming a robust regional integrated communications operator.
PCCW shareholders believe the company is saddled with huge debts and losses. How would you appease these shareholders who have yet to see dividends from investments?
PCCW is in business and it is a very substantial business. The local telecoms business has an annual EBITDA of over US$1 billion, we employ over 15,000 staff, and we have a long and illustrious track record as one of the premier telecoms operators in the region. Obviously, the whole global market for telecoms is suffering from a change of sentiment as capital is no longer as freely available.
There have been more publicised failures by new entrants (in the industry) and some of the old players have not done particularly well in the market. PCCW, like any other company, is being affected by that. What we can assure our shareholders is that we have within our company an exceptionally strong management team. We actually see this period of consolidation as a market opportunity and the time for us to expand. The PCCW management team is quite happy to be judged by results. Just watch the space, just watch what we do and what sort of performances we turn in and I think (the performance) will speak for itself.
Some sectors have been questioning PCCW's seeming lack of concrete business plans, which may have been harshly put, as you have mentioned, especially given the negative market sentiment towards telecoms stocks. But would you tell us where exactly is PCCW after the merger?
We've done a lot in the last 12 months and there's clearly been a lot for the market to digest, but you have to take everything from the perspective of time. PCCW was only publicly-listed in Aug 1999. The Hong Kong telecoms merger with Cable & Wireless was negotiated a little over a year ago at the end of Feb 2000 and we didn't conclude that merger until Aug 2000. Much of 2000 was about completing that merger because of the complexity of the deal.
Simultaneously, we arranged a US$12 million dollar bridge loan that we didn't draw upon until Aug 2000, and negotiated our strategic alliance with Telstra that was completed in Feb 2001. At that point we repaid all the bridge financing and that substantially reduced the company's debt. We took out Asia's biggest loan and paid it back all in a space of about 12 months.
What changes have been made to business operations after the merger?
What we have been doing lately is restructuring the business to unlock more shareholder value, get a better understanding of what our customers want and come up with new services. Our sales team is going out into the market in Hong Kong and into the region to sell the capabilities of the combined group.
In restructuring, we made a conscious effort to create it a flat structure rather than a pyramid one where you don't get much visibility. We took out the major operational units and the eight various groups to make them look and feel more like stand-alone businesses. You have the local telecoms company in Hong Kong and there is the international connectivity backbone called Reach, which now combines with Telstra's international backbone.
There is Regional Wireless Company (RWC) which we are also establishing with Telstra. We have a business-to-business (B2B) unit which does systems integration and complex IT solutions to enterprise. We have our business-to-consumer (B2C) which is about interactive multimedia, the data centres business, and a venture group, which does a lot of our venture investments in Internet companies.
Lastly, we have the infrastructure unit which does property development including the Cyberport project. We get to focus in each of these business unit by operational management and above that, a portfolio management which consists of the executive committee of the board.
Your revenue from IDD services has declined from 60% of your total revenue to a mere 13% as of Dec 2000, how are you dealing with this?
International calling in Hong Kong has actually increased dramatically. Prices are coming down because of technological efficiency, and new cables are coming in, so it's not that expensive to make a phone call anymore. At the same time, the market has opened up. So while the cake is getting bigger, the size of our slice has been getting smaller. We have been seeing declining revenues as a proportion of our total revenues in IDD. We've managed to re-balance our local tariffs and did the last rate re-balancing in January this year.
So which of your business units are actually making money or have the potential to make money soonest?
Our local telecoms in Hong Kong generates over US$1 billion dollar a year in EBITDA, so that is a big stable business. The international wholesale business Reach (formerly called Hong Kong Telecom International) has proforma revenue of over US$1.5 billion per year and close to US$500 million in EBITDA, plus the mobile business which is the only profitable operator in Hong Kong whose EBITDA is around US$115 million per year.
CSL is now part of RWC. Our other businesses tend to be startup in nature and are progressively coming through breakeven and starting to contribute to group revenues. The B2B unit already makes US$150 million per year, not bad for startup business.
Your strategic partnership with Telstra gave birth to three companies with regional focus. Why did you choose to partner with Telstra?
We are seeing consolidation in the global telecoms industry. While the US and the European players have been largely preoccupied in their respective home markets, they have been selling their investments in Asia. We think that as Asia liberalises more, there is an opportunity to create a world-class Asian carrier. We had in HKTI a very good asset, but we believe that this business is all about consolidation and we need to combine it with other quality assets and bulk it up into a bigger business that would then formalise agreements with the European and the US carriers.
Telstra is a Southern anchor to this with an important leg. But as we have said many times before, we are always willing to entertain discussions with other people who think the same way we do about business.
RWC has good assets in CSL, which is basically a Hong Kong operator. What are your plans for your mobile business?
Hong Kong is a good base to start with. Clearly, we know a lot about running a good mobile operation and it is with that knowledge that Cable & Wireless tapped to start MobileOne in Singapore. We still have about 15% of M1 and that asset is recently available for acquisition. We did express an interest in that.
What we are interested in for RWC, is finding assets in the region that we can integrate into a truly wireless regional platform. So we will keep our eyes and ears open. Up until now, there has not been that many good quality assets.
The interest of Asian telcos in 3G investment has fizzled off a little bit. How does PCCW look at 3G?
If you come out from a long history of operational experience, you basically look at things such as 3G as just another technology. We have done 1G, 2.5G; we will do 3G and 4G; and we'll be around by the time 5G is introduced. We've got a realistic view about the timetable when the manufacturers really have the handsets and equipment. We are quietly working away and I am sure we will do an excellent job in introducing 3G and will probably introduce it as early as anybody else in this region.
What are your prospects for Internet Data Centre Co. and Reach?
If you are carrying traffic anyway and you are already putting in equipment and doing facilities management, it's very natural for you to move or build a data centre business. PCCW has quite a few IDC ventures: the Powerbase brand where we do facilities management for companies having mission-critical applications and iLink.net for small- and medium-sized enterprise sector and we have investments in a variety of public companies that are into data centres. We formed a joint venture with Telstra [Internet Data Centre Co.] to build base centres into the region through different interests and we are expanding into Beijing and Shanghai in the Mainland.
As for Reach, we aim to create this global world-class carrier based in Asia and progressively move to become the IP carrier of choice and to serve a variety of customers, whether they are ISPs, ASPs or carriers. This is a scaleable business. If you can get the scale up, then you can get the cost down and that's what gives you competitive advantage.
What has Telstra brought into Reach and how do you build synergy within the company?
Telstra has been separately developing its own network of undersea cable systems. They contribute all of that, in addition to their international gateways. Each party contributed assets, people, customer bases and now we have a chance to manage this larger network more efficiently. Telstra has the domestic network in Australia that complements our large corporate base which we have traditionally served for decades. These clients prefer sophisticated virtual networks over simple switched networks. We hope that they build these sophisticated networks within our physical network.
Non-traditional providers such as content providers are moving into the telecoms space. What sort of challenge do they pose for carriers like PCCW?
Competition has made us sharper. Non-traditional players have brought new ideas and we see ideas from sectors such as the aviation industry or the credit card industry being used in telecommunications. Twenty years ago, it was a standard practice to get the telcos' telephone installed in your home. These days anyone can buy telephone equipment from anywhere. Consumers have a lot more choice even on something as basic as that. All these new ideas have actually been good for consumers and the better telecoms company have been able to adopt and change for the better as a result of that.
Lalou Ramos is based in Hong Kong. She can be reached at lalouramos@mfasia.com.hk. |
