INTERVIEW: Telstra, PCCW JV Reach Tips Tough First Half
By GRAHAM MORGAN
Of DOW JONES NEWSWIRES
SYDNEY -- Asian wholesale telecommunications company Reach forecasts tough market conditions in the regional industry for at least the first half of 2002, damped by continued pricing pressures and lackluster volume growth, Rob Kenny, director of corporate development at Reach, said Thursday.
This is last thing Australia's largest company Telstra Corp. (TLS) wants to hear, since Chief Executive Ziggy Switkowski has publicly pinned his revenue growth hopes on Asia operations in the coming five years.
Reach was created in February 2001, when Telstra and Hong Kong's Pacific Century Cyberworks Ltd. (PCW) amalgamated their Asian assets by forming two joint venture vehicles. Its sister joint venture Regional Wireless Co. houses the mobile assets of Hong Kong Telecom.
Reach and RWC were incorporated into Telstra's accounts for the first time last week, when Reach raised eyebrows by generating revenues of A$1.3 billion in the half year ended Dec. 31, compared to RWC's A$577 million in the same period.
The two ventures are now pivotal to Telstra's growth profile, as the Australian telecommunications industry is growing at just 3%-a-year, meaning Telstra will need to mine opportunities in Asia to drive future growth.
But the Asian telecommunications industry is under pressure, and at best won't see much growth in the first half of 2002, restricting Reach's revenue growth potential, Kenny told Dow Jones Newswires in a telephone interview.
"I think we're seeing, for the market, a relatively challenging first half," Kenny said.
"I think we're going to continue to see price pressure in the first half, but I think things will come back a bit in the second half of the year," he said.
The impact will filter down to the profits of both Richard Li's PCCW and government-controlled Telstra, which booked just A$20 million profit from Reach and A$30 million from RWC in its first half accounts.
The two new profits streams reflect Telstra's 50% stake in Reach and 60% stake in RWC. PCCW owns the remaining stakes in both companies.
Reach Keeping An Eye Open For Acquisitions
"Volume growth has been steady - there were some very bullish forecasts made in the height of the dotcom boom - those didn't turn into reality," Kenny said, noting there is still some growth in revenues.
"It's a challenging thing to forecast because the volumes continue to go up, prices continue to come down and the rate of change of both those numbers is reasonably substantial and difficult to forecast," he added.
That said, Reach is still actively scouring Asia to pick up distressed assets, but Kenny doesn't expect to find anything to match the price and value of the Asian assets bought from U.S.-based Level 3 Communications Inc. (LVLT) in December.
Reach didn't pay anything up front Level 3's assets but acquired US$90 million in working capital from Level 3, after it agreed to assume Level 3's obligations to continue building an Asian submarine cable loop linking Hong Kong, Japan, South Korea and Taiwan. It also gained control of Level 3's Japan-U.S. cable.
In addition, Reach assumed Level 3's operating licenses in South Korea and Taiwan, and hooked up with two new joint venture partners South Korea's Daihan (Q.DEI) and Taiwan's Yulong.
"Since Reach was set up we've had a 'build or buy' strategy, which means we're not dogmatic about building our cables, we'll just go out and (do) whichever one is cheapest," Kenny said.
"There aren't many assets quite as cheap as the L3 assets and having done the L3 transaction we've secured the capacity we need for some time to come. We're certainly not champing at the bit," to make acquisitions, Kenny said.
Reach Targeting More Wholesale Customers
As the industry consolidates in Asia, as it is elsewhere in the world, Kenny expects pricing to stabilize, and in the long-term to come down.
In the meantime, Reach has the blessing of its two parent companies to look for acquisition targets in Asia, mainly to stimulate growth outside their respective domiciles of Australia and Hong Kong.
"We have a lot of interaction with our parents through usual structure of board meetings and so on. In terms of acquisitions...we've had pretty good support from our parents," he said, but declined to name potential targets.
Aside from acquisitions, Reach is pushing to outsource its international wholesale services, including voice, Internet and broadband capacity to customers other than its parents.
"It's quite a long, gradual process, to persuade somebody to outsource...clearly that represents significant potential growth for us," Kenny said.
-By Graham Morgan, Dow Jones Newswires;
61-2-8235-2962; graham.morgan@dowjones.com
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Updated March 14, 2002 2:18 a.m. EST
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