Telstra has emerged as the latest potential savior for Hong Kong-based regional network operator Pacnet, with Australian incumbent having confirmed a Bloomberg report that it is in talks with Pacnet's owners about a possible acquisition.
The reported US$1 billion price tag may be a deterrent, though, and it may already have put off some suitors: Five months ago it was Citic Telecom International, part of the Beijing-backed Citic conglomerate, that was courting Pacnet . (See Asian Carriers Court Takeover Bids ).
For Pacnet's main shareholders -- private equity firms Ashmore Investment Management, Spinnaker Capital and Clearwater Capital Partners -- this is another attempt to settle the future of the company that has struggled to compete against heavyweight operators in selling bandwidth and data center services.
Two years ago, having shelved plans for an IPO, the owners replaced long-serving CEO Bill Barney and his senior management team. (See Pacnet Calls Time on Its CEO.)
Pacnet's main asset is its wholly-owned 36,800-kilometer EAC-C2C network, which has up to 30 Tbit/s of capacity running to and from each landing country: The network runs from Japan to Singapore, with landing points in Hong Kong, China, South Korea, Taiwan, and the Philippines, according to the operator's website. The operator also owns part of the Unity cable that runs from Japan to the US and has capacity on the i2i subsea network that runs from South-East Asia to India.
Pacnet's network pipes as well as its installed customer base make it an attractive proposition, as does its experience with carrier SDN capabilities, but its owners are believed to be seeking $1 billion for the company. (See Pacnet Turns On SDN in APAC, US.)
Pacnet's current financial position suggests that Telstra Corp. Ltd. (ASX: TLS; NZK: TLS), or any other potential buyer, might be able to negotiate on price. Moody's Investors Service cut Pacnet's debt rating to B3 in August, noting that the operator's liquidity position was "fragile" and that it may need a cash injection from its parents to meet $20 million of interest payments due by the end of December. At the time of the downgrade, Pacnet had about $30 million in cash and no credit facilities it could tap into.
According to the Moody's report, Pacnet generated revenues of $226.6 million during the first half of 2014, slightly down from a year earlier. It reported an operating loss of $26.1 million during that period, but that was a substantial improvement compared with the $67.4 million operating loss from a year earlier. The ratings agency believes Pacnet needs to boost its network capacity sales and ramp up its data center revenues, which during the first half of this year accounted for just 10% of sales. To mitigate the volatility of capacity revenues, Moody's believes Pacnet needs to generate at least 30% of its sales from data center activities.
Telstra already operates thousands of kilometers of subsea cable capacity, but relatively little of this is available to serve its target markets in South-East Asia. Much of what it does own is locked up inside Reach Networks, a joint venture with PCCW Ltd. (NYSE: PCW; Hong Kong: 0008) forged at the height of the bandwidth bubble 14 years ago. Reach was restructured in 2005 with $1.2 billion in debt, after which the two owners took over the debt and bought all of the available capacity as IRUs for up to 22 years.
Pacnet's origins also go back to the dotcom days. It was founded by Global Crossing, Softbank and Microsoft in 1999 but sunk into Chapter 11 when the market crashed. It was acquired by Chinese carrier China Netcom and later sold on to the private equity firms in 2006.
— Robert Clark, contributing editor, special to Light Reading