Telstra shortens its Reach
Glenda Korporaal in Hong Kong
FEBRUARY 04, 2002
TWO years after its much trumpeted big push into Asia, and a year after it finally consummated the deal, a more subdued Telstra is taking a much lower profile about its Hong Kong joint ventures with Richard Li's Pacific Century CyberWorks.
Telstra says its does not want to talk about the ventures - a mobile phone company, CSL, and the undersea cable company, Reach, which formally got under way on February 7 last year - before it announces its half-yearly results in March.
A year ago, Telstra paid PCCW $2.4 billion for a 60 per cent interest in its mobile phone company, CSL, and combined its international phone and data business with PCCW's, to form a 50-50 joint venture internet backbone protocol company called Reach.
At the same time, it issued a $US750 million ($1.4 billion) six-year convertible bond to PCCW.
"There's not much that's new to talk about," Hong Kong-based Telstra International president Dick Simpson told The Australian.
"Things progress well and we've both settled into a productive working relationship."
The hope that linking up with young internet tycoon Richard Li would provide the connections for a bold leap forward into China and other Asian countries has long since evaporated.
Richard Li now takes a very low profile in his home town, with many Hong Kong investors still angry at the amount of money they have lost on PCCW shares, which have been languishing for many months at around $HK2, compared with market heights of $HK28.50 in early 2000 when Telstra was negotiating the deal.
Although PCCW is working to boost its financial position and its credibility, Richard Li's name is no longer the asset it was in Asia and the company has no desire for expensive new deals.
Telstra and PCCW are now going their own ways in China with Telstra linking up with China's second largest mobile phone company, China Unicom, advising it on the rollout of its CDMA mobile phone network while PCCW is pursuing other modest ventures on the mainland.
Asked to assess the deal, one year after its consummation, Hong Kong brokers agree Richard Li got the best of it.
"The people who should be celebrating this anniversary are PCCW management and its shareholders," said telecoms analyst Peter Milliken of Lehman Brothers Asia on Friday.
"It's an anniversary that (Telstra chief) Ziggy (Switkowski) and company would rather forget.
"People talk about what a great deal maker Li Ka-shing is, but Richard Li did pretty well for himself on this one," said ABN-Amro's Hong Kong telco analyst, Joe Locke. "I don't think it was the best deal going for Telstra.
"It's fair to say the marketplace in Australia is concerned about the risks involved with Reach and, possibly to a lesser extent, CSL," Deutsche Bank's Sydney telco analyst, Stephen Wood, says.
One Hong Kong analyst who did not want to be named argues the immediate future for Telstra is not in Asia but at home where the collapse of One.Tel and Hutchison's problems show how strong the company is in its domestic market.
"A lot of people in Australia think they (Telstra) have a big strategic view to do things in Asia," the analyst says.
"I don't think they do. I think they realise that all power is aggregating to the domestic carrier in Australia and the focus of people like (chief financial officer) David Moffatt will be very much on the domestic market."
Telstra has already admitted it paid too much for mobile phone company CSL, writing off $1 billion of the investment in last year's results.
But the big concern for Telstra shareholders is the unknown financial state of Reach, operating in a market oversupplied with international voice, internet and data traffic.
It is a market which has seen the collapse of US-based Global Crossing (currently the subject of a bailout proposal by Li Ka-shing) and the sale of US-based Level 3's Asian assets to rival Reach for the fire-sale price of 17c in the dollar.
In its latest report on Reach, broker ABN-Amro says the company is now in the red, making net losses of $30 million for 2001 and predicts it will loose $200 million in the four years to the end of 2004.
While the deal with Level 3 is seen as a very good one for Reach, the extra capital expenditure required to finish rolling out Level 3's Asian cable network is expected to see Reach go into negative cash flow of some $60 million this year.
Reach began its merged life last year with a combined turnover of $3.8 billion and earnings before interest and tax (EBITDA) of some $1 billion.
ABN-Amro now estimates that Reach's 2001 revenue will fall to $2.8 billion in 2001, $2.6 billion in 2002 and $2.4 billion in 2003 and 2004.
The broker report shows Reach's EBITDA for 2001 will come in below the $800 million to $1 billion predicted by Telstra.
The report predicts a figure of $774 million - more than $200 million down on where it started a year ago.
Market sources in Hong Kong say that Telstra would prefer to be in the driver's seat at Reach, as it is in CSL where it has 60 per cent ownership, and would love to pick up the other half of Reach from PCCW at a fire-sale price.
However, a gradual improvement in PCCW's financial position would make it harder for Telstra to buy out its 50 per cent stake at a cheap price as PCCW is pushing out its debt repayment schedule and is no longer in need of ready cash.
Nomura's Hong Kong telecoms analyst, Richard Ferguson, argues that while the industry is a tough one, Reach is in a much stronger position than many of its competitors with its role further boosted by the Level 3 deal. The takeover of Level 3's assets has the potential to give Reach a critical mass in Asia - which will not only help market share but give it more market power when the industry recovers.
The Level 3 deal gives the company both capacity (in the form of cables around Asia and between Japan and the US) and assets in the form of licences in the critical markets of Japan, Korea and Taiwan.
"Wholesale prices have dropped between 20 and 80 per cent across the world but for Reach is it more like 20 per cent," Ferguson says.
Reach has indicated it is prepared to take advantage of the financial problems in the industry by picking up other distress-sale assets around Asia.
This could possibly include interests in "club" cables where bands on companies get together to own cables.
"The market is consolidating and at the end of the day they are going to be in there," says Ferguson.
"In three to four years' time the Level 3 acquisition and the joint venture will be seen as quite an intelligent deal for Telstra."
The other question is whether mobile phone company CSL can deliver on the projected EBITDA of $300 million to $350 million for 2001. Some Hong Kong brokers are expecting it could come in lower given the big fall in revenues per customer in the industry but its situation is far less volatile than Reach's.
On its track record so far, CSL, which is run by Hong Kong mobile phone industry veteran Hubert Ng, with Telstra's Mike Robey as chief operating officer, is not likely to deliver any nasty surprises for Telstra shareholders.
CSL's major problem is its long-term growth potential in Hong Kong's small market of only five million people.
With its market share at around 20 per cent (well down on levels of several years ago), CSL has deliberately rejected low-end customers, focusing on total revenues per customer through more value-added services.
It is now promoting short messaging service (SMS), which is just becoming available in Hong Kong and its 2.5G services (which allow easier downloading of internet and data on mobiles), while gearing up for the 3G market, which is expected to get off the ground next year.
While analysts express disappointment that Telstra and PCCW have not delivered on plans to use CSL as the base for a larger Asian mobile phone business, with the collapse of talks last year to buy Singapore's M1 mobile phone company, they were pleased the partners baulked at paying a high price for M1 and walked away from the deal.
Over the longer term, Telstra still hopes that running a good mobile phone business in Hong Kong could help its credibility in China.
But these days its grand Asian plans are much more subdued.
australianit.news.com.au |
