NTT Wins the Auction for Pacific Crossing

May 25th, 2009 by · 7 Comments

pc1In late March, news began to dribble out that the transpacific cable PC-1 was for sale, and the two bidders were apparently the Japanese telecom giant NTT Communications (NYSE:NTT, news, filings) and privately held Pacnet.  At the time, I put my money on NTT and if this were Vegas I would have won.  Today NTT announced that it has entered into a contract to buy the cable from its private equity owners.   Of course, it wasn’t exactly a longshot bet.  NTT was by far the most logical place for the PC-1 to end up, in fact I’m surprised they didn’t acquire it sooner.

NTT will supposedly keep the PC-1 team in place, which makes sense given that they don’t have a parallel group anyway.  Now, with its own undersea cable to the USA, NTT is well positioned to increase its influence beyond Japan.  In an article last week Telecom Ramblings looked at the rising clout of NTT America, and this deal only serves to emphasize that presence.  Might NTT use this acquisition as a stepping stone to further expansion?  NTT+PC-1+Qwest-Longhaul?  The only thing I see holding that concept back seems to be those pesky contracts with the US government.

As for Pacnet, there was no real chance they could outbid NTT if the latter decided to buy it, so I doubt this came as too much of a surprise.  However, I continue to hear that Pacnet is talking to China Telecom and it is very possible that today’s M&A will trigger China Telecom (NYSE:CHA, news, filings) to make its own undersea grab.

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Categories: Mergers and Acquisitions · Undersea cables

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7 Comments So Far

  • Rob Powell says:

    According to telegeography, the price was $105M – well above earlier guesses of 80-90M.

  • Johson Leung says:

    Everyone has noted the sharp drop in capacity prices in Asia this year and there is no indication that bandwidth needs will rise fast enough to slow this decline in the near future. NTT’s announcement of Asia America Gateway continues the exponential expansion of Intra-Asia and Asia-USA capacity.

    The loser in this round of expansion is PacNet who must be desperate to find a purchaser before their business model falls off a cliff and their PE investors tire of cash calls.

    Pacific Crossing commanded a premium as it was a strategic asset, but with 4 cables built or being built in Asia it is unlikely PacNet will command the same premium.

  • Michael Rodgers says:

    Consortium cables are riding the storm due to participant traffic but the private cables, especially EAC/C2C and to a lesser extent IA/TGN must be feeling these brunt of savage bandwidth price declines.

    To add to PacNet’s woes is that, given the Pacific Crossing’s (now NTT ) management teams’ roots in establishing PacNet and Asia Global Crossing, we should expect especially savage competition on the Asia routes if/when AAGateway is completed.

  • Zed says:

    I don’t quite get why the sale price for PC-1 was so low. $105M seems to be a great deal less than replacement costs. Given that several new cables are to be built in the region, wouldn’t it have been more cost effective for these prospective builders to just buy PC-1 instead?

  • Martin Rocks says:

    Answer is simple and nothing to do with the attractiveness of the PC1 purchase… most of the other big regional players have already committed to cables and/or are bypassing Japan with their newer systems and/or have insufficient cash or need for full ownership of a transpacific cable.

    Those dealing with these cable consortium members know that getting any two incumbents to agree on a purchase which could advantage another is neigh impossible regardless of the business economics.

    Unity is a little different and this is why PacNet made their passing attempt (in their usual ..let me swap you my hugely valuable equity for your worthless PC1 equity) to try to buy PC1. It would have made sense for them to control the subsea system which provides their lowest cost links to USA (a result of the old Global Crossing break up) and where the majority of their external OA&M is paid.

    NTT has done its homework. Coupling this system to their newly announced Asia America Gateway means they have cable assets to rival TATA and SingTel and they will have cost advantages in delivering Asia capacity to USA.

    NTT has become a force to watch in Asia.

    The loser is clearly PacNet despite all their bravado about pursuing other more interesting M&A options. If I was an investor in PacNet I would be looking at a quick sale before their valuation drops further and sales plummets as newer and cheaper capacity options emerge.

  • Johson Leung says:

    Actually the new NTT system is Asia Pacific Gateway.

    I am struggling on the economics of the APG system and also the mooted new SingTel sponsored cable. The driving factor seems to be the inability of the incumbents to feel comfortable with private cable operators like TATA and PacNet.

    Without the deep pockets and network gravity of a large regional player the smallest private operator, PacNet, must be feeling the drop in sales and fall in prices. Other contributors have predicted a sale of PacNet in the near future but I am not sure bankruptcy isn’t a possibility given the massive increase in competition on the former monopoly intra-Asia route, their need to cover some huge O&M costs on their network and also their lack of success in their Pacific Internet acquisition.

  • Rob Powell says:

    I doubt very much that BK is anywhere near. It takes much longer for the fundamentals to deteriorate so far as that, and it wouldn’t benefit Pacnet’s backers who probably own their debt anyway. A sale to one of the incumbents seems much more likely.

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