Rumor Mill: China Telecom Eyeing Pacnet?

April 30th, 2009 by · 9 Comments

pacnetmap1Is China Telecom (NYSE:CHA, news, filings) about to snap up Pacnet?  According to sources familiar with the discussions, due diligence has been going on for some weeks now and China Telecom’s interest seems real, although financial details of such a deal are not yet clear.  Pacnet, which operates the old Asia Global Crossing cables amongst other assets, has been making noise for the past year and there has been M&A talk around them several times.  However, while those rumors – a bid for AAPT or for a content delivery network – never made much sense to me, this one actually does both on strategic and financial grounds.  Pacnet’s recent visibility may always have been more about finding a suitor than anything else. Certainly some have argued that Pacnet’s private equity backers may prefer such a scenario.

Rapidly rising traffic on its own turf on the mainland has been rapidly transforming China Telecom into a global player, one that Renesys now ranks as the #11 IP backbone worldwide.  Yet growth in traffic levels and influence have outpaced similar growth in physical assets, meaning that China Telecom’s international presence remains mostly virtual and even their regional presence lags.  While they have been moving to change that via investments in the TPE and APCN3 cable systems amongst other initiatives, buying Pacnet would give them a powerful regional presence and far greater control over their connectivity.  It would be an excellent stepping stone toward many other world markets.  As to why China Telecom would now want what sibling China Netcom nonchalantly sold off so recently in mid 2006, I think the earthquake and cable cuts off Taiwan which happened just six months later may have changed some minds.  That event certainly brought home how important that diverse physical connectivity is and how powerless one can be without it.

If a CT/Pacnet deal really happens, one might wonder further about the status of the Unity cable of which Pacnet has been amongst the biggest supporters, and of other systems Pacnet is part of.  But I think that if they do this, China Telecom wouldn’t be looking to change or hamstring such projects, but rather to have a hand in all of them.  In fact, the resources they might bring to the table could solidify backing for those projects.

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Categories: ILECs, PTTs · Mergers and Acquisitions · Undersea cables

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9 Comments So Far

  • Jason McManness says:

    Makes sense … insiders report sales are plummeting in all markets (but Australia which is not on-net) and the rest of 2009 looks worst as they loose monopoly on the intra-Asia routes and they struggle to fill the gap left by their flagging wholesale business.

    Their investors, such as Ashmore, must be hurting with their own investor redemptions and plummeting fund valuations.

    A sale such as this was inevitable as many others have commented on this forum that the current PacNet model simply doesn’t generate enough revenue to cover these new cable ventures and the OA&M of their extensive but underutilized cable system.

  • Innocent Wong says:

    Having dealt with these guys previously on a substantial capacity purchase, PacNet’s current CEO has to take a lot of the blame for PacNet’s current problems as his “take no hostages” approach has burnt bridges with most Telcos in Asia causing more than one of the current new Asia cables to be built simply due to his intractability and arrogance.

  • Sumon Anusitthakul says:

    Another reason for the recent interest in PacNet is the reassessment of PacNet’s valuation by their financial investors. Whilst Telecom assets like PacNet have not exactly hit rock bottom they have retreated from last year’s heights and must seem a bargain.

    The difficulty in the valuation is separating the subsea from the former Pacific Interent business. PacNet’s investors will want to offload the entire business but CT will be cautious about acquiring PacNet’s toxic ISP operations.

    We may see a split in the operations with the creation (recreation) of a separate PacNet ISP entity and only the sale of the subsea operations to CT.

    As someone commented in another article, PacNet’s recent noise may be more about raising their perceived value to a potential acquirer rather than some serious strategy of regional acquisition.

  • Insider says:

    The story is really about financial investors offloading this asset as the intra-asia cable price war starts to pick up. This is not dissimilar to other toxic assets except for the lack of government intervention. Any insider can tell you the company could barely cover the operational costs of the EAC network and has very little hope to sell in H2 2009 and beyond anything like the capacity required to support the C2C system let alone their Unity project.

    The flip story is how the media has been played (very expertly) for the last 6 months as PacNet tried to build up noise and credibility for this sale but with actually very little substance or truth behind their press releases and interviews.

    I am not sure whether to applaud PacNet for its skill in setting up this sale or be appalled at the media’s gullibility.

  • David Stevenson says:

    It never ceases to amaze with private equity owned Telecom assets how incredible their business plans must be to sustain the required 15%+ ROI required by these funds.

    Ashmore, PacNet’s prime investor had a torrid year in which developing economy equities dropped 54% and Ashmore’s funds lost $12.9bn.

    Whilst Ashmore has said it will start investing in the markets again it, this time they will be focusing on commodities and infrastructure which were it’s traditional strengths. In another comment it was calculated that the ROI on another private equity funded cable, Pacific Crossing, has been less than 6% and, if I could hazard a guess, the ROI on the PacNet investments by Ashmore and others (given the almost complete elimination of the Pacific Internet franchise) would be even less.

    If you look at the public data the cost of acquiring the EAC/C2C assets was in the order of $US250M and the cost to acquire Pacific Internet was about the same. If I was a PE investor I would quickly spin off the subsea assets in the region of $US300M to $US350M and continue to run the ISP business whilst looking at suitors to buy the more profitable operations (Singapore, Australia, HKG-CHina) and exit the rest.

    So where does this leave PacNet ? – with a very extensive cable system which is , according to TeleGlobe, lit to around 8% of design capacity and no competitive exit ramp to USA if Unity doesn’t go ahead.

    Although they have acted in a credible manner previously they are essentially a wholesaler and their foray into CDN and ISP was, at best, a management distraction which meant other players had nearly 2 years to play catch up. The slam dunk for PacNet will be the loss of their intra-Asia monopoly meaning their hapazard maintenance on their prime asset, EAC, will not work anymore and they will need to focus on providing a more resilient and reliable network. All of which costs considerable amounts of new capital which their investors must be rethinking.

  • Insider2 says:

    As if we needed any more confirmation. The CEO of PacNet announced to all senior staff recently that they may hear rumors of a possible purchase but not to worry as it was not true … He said the same thing about rumours of redundancies two weeks before the last staff cut.

    Go figure !

    For many staff this will be the end of a 3 year roller coaster with the company going through swings in direction and an almost total change in senior and country management.

    The mood internally has been ugly and most hope the new acquirer is able to provide firm leadership and a feeling of credibility which has been lacking in the recent past.

  • Lisa Lai says:

    The purchase of PacNet makes sense for China Telecom as we have already signed an agreement to participate in TPE and this purchase would add intra-asia connectivity to our trans-pacific capacity.

    At the moment PacNet does not have efficient access to USA so there is no overlapping costs of CT in this acquisition.

    We are told the main problem is PacNet’s high valuation and the costs of some of the management contracts.

  • Johson Leung says:

    PacNet contiunues to be vulnerable to the current intra asia cable price wars and without a low cost transpacific circuit they will eventually loose out to the newer and faster club cables.

    PacNet’s loss of their bid for Pacific Crossing also poses a immediate dillema … invest heavily in the Unity venture for a dubious return or accelerate the sale to China Telecom.

    Given the pressures on PE funds, my guess is Ashmore and others will push for a quick flip of this non-strategic asset with a 15% to 20% margin to purchase. This would value PacNet at around $US800M and well within the appetite of China Telecom.

    Watch out for more on this sale in coming weeks.

    (May 25, 2009 NTT Communications (NTT Com) announced that it has concluded a contract with the shareholders of Pacific Crossing Limited (PCL), operator of the PC-1 trans-Pacific cable network, to purchase all issued shares of PCL)

  • china wi max says:

    Recently seeing another Chinese telecom startup building a network there- China Wi-Max

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