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Asian Carriers Court Takeover Bids

Robert Clark
News Analysis
Robert Clark
8/1/2014
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Two perpetually struggling international bandwidth businesses have reportedly stepped up their efforts to be acquired, and both are being looked at by the same Hong Kong-based wholesale operator.

Global Cloud Xchange , the subsea capacity division of India's Reliance Communications Ltd. (RCom), looks set to be sold to Citic Telecom International Holdings Ltd. (CTI), a unit of the Chinese government investment group Citic Pacific, according to CNBC TV-18.

Citic has also been linked to Pacnet , the progressive wholesale and enterprise service provider that is believed to be seeking US$1 billion for its current private equity owners. (See Asia's Telcos Still Figuring Out Their Cloud Moves and Pacnet Turns On SDN in APAC, US.)

RCom has been trying to offload its capacity division, until recently known as Reliance Globalcom, for years. In 2009, the Indian operator was rumored to be seeking a buyer for its submarine cable properties (formerly FLAG Telecom), and reportedly was close to selling the entire global unit in 2013. It also considered an IPO in 2012, but abandoned that plan. (See Rumor: Subsea, Ethernet Assets for Sale and Reliance Global Unit Sale Imminent.)

The timing of the latest M&A reports is intriguing, given that Reliance only introduced the Global Cloud Xchange (GCX) brand just four months ago, and recently announced a new cable project to provide a direct subsea link between Mumbai and Singapore. (See Reliance Rebrands With Its Head in the Cloud and Global Cloud Xchange Plans New Mumbai-Singapore Link.)

It also appointed Bill Barney, the former CEO of Pacnet, as its CEO in January this year. (See Pacnet Calls Time on Its CEO.)

The deal with Citic has been in the works for months, but was reportedly delayed while GCX completed a $350 million debt issue, which was successfully completed this week. Most of the proceeds will be used to pay off a $250 million loan to GCX's parent, though some of the remaining funds will go towards the construction of the Mumbai-Singapore link.

Pacnet, which was formed in 2008 from the combination of the collapsed Asia Global Crossing and Singapore's Pacific Internet, has found the going hard in the bandwidth and managed services market, where competing with Tier 1 telcos and dealing with continual price erosion make trading tough. It generated revenues of $471.6 million in 2013, down 9% from the previous year, but its gross margin improved to 56% from 50% as it discontinued some lower-margin services.

Like GCX/Reliance Globalcom, it also considered an IPO (in 2011).

The potential involvement of Citic Telecom in both potential deals is no coincidence, as it highlights the determination of Chinese authorities to keep their communications secure in the wake of the Snowden revelations.

Julian Rawle, principal at Julian Rawle Consulting, said the Chinese "don't want to rely on others for their development -- they want to reach the US directly."

However, a further twist could be that any sale by RCom to a Chinese government-backed telco would need approval from Indian security officials. The two Asian giants have an uneasy relationship, and India has put controls on Chinese vendor gear being deployed in Indian networks.

— Robert Clark, contributing editor, special to Light Reading.
Dan O'Shea, Managing Editor, also contributed to this article.

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R Clark
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R Clark,
User Rank: Blogger
8/2/2014 | 12:34:18 AM
Re: Still just a scale game?
I think IoT is a much bigger play for telecom access rather than longhaul. Right now the big driver on subsea capacity is 4G data and video but the problem is these smaller players just can't get much of the action. The owners of both these cables have been trying to unload the assets for several years and clearly they don't see it getting better regardless of the aggregate demand.
sam masud
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sam masud,
User Rank: Light Sabre
8/1/2014 | 11:15:06 AM
Re: Still just a scale game?
As you say, there maybe overcapacity in long-haul. But what I finding interesting is that they are unloading assets at a time when there is a huge buzz about Internet of Things and all kinds of speculation on how much traffic IoT will generate.

 
R Clark
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R Clark,
User Rank: Blogger
8/1/2014 | 8:44:22 AM
Re: Still just a scale game?
I think the lesson that was apparent in the bandwidth bubble still applies, which is you've got to have demand at the end of your pipe. Most longhaul subsea cables are backed by tier 1 carriers who all have customers to serve. RCom and Pacnet just have that and that's why they've struggled, especially when prices are falling steadily year by year and every two to three years you're going to have to tip in for an upgrade. Citic Telecom has quitea may not have that but this is a political as much as commercial play for them.
Ray@LR
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Ray@LR,
User Rank: Blogger
8/1/2014 | 8:05:52 AM
Still just a scale game?
Is this still a scale game? How many subsea wholesale operators should there be in the world?
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