Global Crossing deal brings Asian consolidation
By Joe Leahy in Hong Kong
Published: January 29 2002 17:01 | Last Updated: January 29 2002 22:18
The planned takeover of Global Crossing, the US fibre-optic communications operator, by two Asian-based companies is another big step towards consolidation of the highly competitive undersea cable business in the region.
But it is unlikely to provide any immediate solution to the industry's problems of chronic over-capacity and falling prices, analysts say.
On Monday, Hutchison Whampoa, the Hong Kong-based telecommunications and ports conglomerate, and Singapore Technologies Telemedia, Singapore's second largest telecoms carrier, announced they planned to inject US$750m in new equity into Global Crossing as part of a rescue package for the bankrupt US carrier.
The deal was expected to leave the partners with a joint 70-80 per cent stake in Global Crossing, Hutchison said on Tuesday.
The takeover follows the exodus from Asia of Level 3, another independent US wholesale provider of international voice and data telecommunications capacity, on December 19.
Level 3's Asian operations were taken over by Reach, a joint venture between Hong Kong's Pacific Century Cyberworks and Telstra Corp, Australia's leading telecommunications carrier.
The two deals have left most of Asia's fibre-optic undersea cable networks under the control of regional carriers or international telecommunications syndicates running what are known as "club cables".
For Hutchison and Singapore Technologies, the Global Crossing takeover will have strategic benefits.
Currently, they run fixed line joint ventures that act as alternative carriers to the incumbent operators in their home markets; PCCW in Hong Kong and Singapore Telecom in Singapore.
But unlike the incumbents, they have hitherto lacked their own international undersea cable networks. Customers prefer carriers who control their entire networks because they can provide a better guarantee of quality, says Richard Ferguson, regional telecoms analyst with Nomura in Hong Kong.
"At the end of the day, people pay for the seamless service," Mr Ferguson said.
For Hutchison, the acquisition of Global Crossing is also a rearguard action aimed at protecting its existing assets, analysts say.
Hutchison's fixed-line operation in Hong Kong is a joint venture with Asia Global Crossing, a 58 per cent-owned subsidiary of Global Crossing. Hutchison still has US$400m in convertible preference shares in Global Crossing, issued when it formed the joint venture with Asia Global Crossing.
"It now appears a near certainty that this will have to be written off if the restructuring is approved by creditors," CLSA, a brokerage, said in a research note.
Hutchison declined to comment on the future of the shares. "We won't know until the restructuring is done," it said.
If Global Crossing collapsed, this would put pressure on the Hong Kong joint venture with Asia Global Crossing.
"Hence, the high risk/high return strategy that Hutchison is being forced to pursue," CLSA says, referring to the Global Crossing takeover.
For the industry as a whole, the recent shakeout will do little to solve problems associated with over-capacity, which has caused wholesale prices to decline by up to 80 per cent over the past 12 months, according to Nomura.
Total submarine cable capacity landing in Hong Kong alone is expected to rise from from 60 gigabytes per second at end-2000 to 580gps by the end of 2002 - upgradeable by up to 30 times on demand.
"Where does pricing power go with that?" Mr Ferguson said.
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