ANALYSIS: Telstra targets major Asia expansion with $697 million move for Pacnet

ANALYSIS: Telstra targets major Asia expansion with $697 million move for Pacnet

Telstra is set to purchase Pacnet for $697 million, in a deal that will position it as one of the region’s largest wholesale and enterprise players.

The acquisition – its largest deal to date – will give Telstra ownership of Asia’s biggest privately-owned subsea cable network, which stretches 46,000km and provides access to 109 PoPs across 61 cities, as well as 29 data centres in 17 cities.

As well as offering scale, the network brings sophistication. Pacnet focussed on technology advancements in 2014, launching a landmark SDN platform in February and adding NFV features in July, radically changing the way it can provision and manage its network services. The developments landed the company the Global Carrier Award 2014 for best Asian carrier

Telstra has already made clear its intentions to use the additional infrastructure and technology to pursue opportunities in cloud computing, unified communications, managed network services and security services. Crucially, Telstra will also snap up Pacnet’s two key customer segments: 220 carrier customers – comprising both retail and wholesale telecoms players – and 2,400 enterprise customers in markets such as financial services, internet and technology.

The combined entity looks set to support the growth of Australian and Asian businesses in the region. Pacnet also controls two of the five fibre pairs on the Unity trans-Pacific subsea cable connecting the US to Asia, and through this Telstra could also target OTT companies and large organisations in the US looking to expand in Asia.

Given its network size and stature, Pacnet’s $697 million price tag appears good value. Pacnet has been linked with a number of companies in the past, most notably in 2012 when PT Telekomunikasi Indonesia reportedly cancelled a $1 billion deal for the Asian carrier. The failed move coincided with the shock resignation of its then CEO Bill Barney. His replacement, Carl Grivner, then embarked on an aggressive data centre roll-out strategy, which saw a reported $200 million investment in the market in two years. Despite this attempt to diversify the company’s service offering and bring technology advances to its network, an infrastructure-heavy business such as Pacnet remains a risk in this business climate.

The takeover value is said to include Pacnet’s gross debt of approximately $400 million, and it was only last year that the operator’s debt rating was cut to B3 by credit rating agency Moody’s, due to the fragility of its liquidity position.

The deal is subject to regulatory approval and is expected to be completed by mid-2015, when Telstra will conduct an extensive integration programme that is expected to take up to two years.

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