Reach, the joint venture between Australia's Telstra Corp. and Hong Kong's Pacific Century Cyberworks Ltd. (PCCW) has announced plans to acquire the Asian assets of U.S.-based broadband infrastructure company Level 3 Communications Inc.
Under the terms of the agreement, Reach will take over Level 3's ownership interests in its North Asian undersea cable system, Tiger, connecting Hong Kong and Japan, and its Japan-U.S. cable systems, a Reach statement said. Other Asian assets and operations including customers, in-country networks, data centers, and US$90 million of working capital, most of which is cash, will also be part of the transaction, the company said.
At the same time, Reach will assume Level 3's capital and operating cost obligations as of Nov. 30, including $170 million for the completion of the submarine cable systems, the statement said, adding that Reach would not assume any of Level 3's debt.
According to Reach, the acquisition would allow it to enter the Taiwanese and Korean markets, which it has not yet penetrated. The deal would also give Reach access to Type 1 or facilities-based licenses in both those countries, allowing the company to sell and provide wholesale fixed services, instead of having to buy them from another carrier, said Alistair Grieve, chief executive officer of Reach.
The assets acquired include Level 3's cable landing stations in Hong Kong, Japan and Taiwan, subject to regulatory approval, said Robert Kerry, corporate development director at Reach. The agreement would also give Reach network connections or backhaul links in Hong Kong, Japan and Taiwan, from cable landing stations to service providers' points of presence (PoPs) located in those cities, he said.
Reach will also acquire Internet data centers in Hong Kong and Tokyo, the company said.
Even though there is a bandwidth glut in the region, with new submarine cable systems in place and prices spiraling downwards, customer volume in those sectors is still growing fast, said Grieve.
"We'll have additional capacity at little cost, but it will only be useful if we can fill it, so we're definitely expecting to grow the markets," said Grieve. Greater capacity would mean that Reach can have room for a redundancy system to reroute traffic in the event of cable breaks, which are common, he said.
Level 3 Asian customers will also be transferred as a result of the acquisition, and Reach expects to adopt about 80 customers, though some might overlap, the company said.
While the growth of bandwidth-intensive data and IP services is expected to propel the telecommunication market, voice businesses, such as International Direct Dialing (IDD) services remain a strong source of revenue, said Grieve. "IDD is a very important service and is still growing," he said. "We are a seeing a stabilization of pricing and margins (for IDD services)."
Reach claims that the acquisition will allow it to save on capital expenditure in the long term. "To expand our Australia-Japan capacity, we would have had to purchase Japan-U.S. cable capacity, but we'll not have to now," said Kerry, adding that there would be other tangible benefits to the deal in the long term.
The integration process is expected to be completed within 3 months, and will be cash flow positive by 2003, Kerry said.