Telstra revamps PCCW deal

Telstra and Pacific Century Cyberworks (PCCW) have moved to end any uncertainty over their Pan-Asian market alliance, which includes the sale of Telstra's and PCCW's wholesale network business into a new entity.

Although the terms of the alliance are still subject to review pending market conditions and shareholder approval, the three-pronged agreement looks set to go ahead after revised conditions were released to the market.

The revised financial terms are expected to save Telstra around $1 billion on the original negotiations with PCCW. According to Martin Ratia, public affairs manager for Telstra's global wholesale group, this was due to the volatility of telco stocks in recent months.

"The PCCW share price had suffered considerably in recent months, so the original agreement didn't make sense anymore," he said. "This agreement is a re-evaluation based on the changes in both our companies' share prices."

Under the revised terms, Telstra will acquire 60 per cent of the HKT mobile network from PCCW for $US1.68 billion. The two companies will consolidate their Internet hosting services into an Internet Data Centre company and both will contribute an equal amount of assets to form an IP Backbone company.

The IP Backbone company will be a separate entity formed by the merger of Telstra's global wholesale business with the equivalent business at PCCW. The company will then have to pay back the two telcos for the investment as it grows.

"After an evaluation, it was decided the two IP network businesses were close to equal, so it's a 50/50 deal, except that Telstra gets to appoint the first chairman," said Ratia. "The new entity has a five-year plan to be a top global player in the wholesale market."

The agreement marks a major move for Telstra in shifting its focus to the international wholesale market. While Telstra is a major player in the southern Pacific region, the PCCW deal sees its presence extend into the north Pacific region, with spurs branching off into Asia and North America.

"Telstra is a relatively small company in terms of its international operations," said Ratia. "It needs partners to get around the region and the world. Telstra's primary market will always be Australia, but unless we populate the Simpson Desert, we can only grow so much. There has been an ongoing loss of market share here as more and more companies move into the country to cherry pick at the market. We need a share in the global market or the company can only get smaller."

According to Telstra officials, there are few implications for Telstra's wholesale customers in Australia, as the management is confident there will be no changes necessary in the way they do business.

"Australian wholesale customers should get the benefit of whatever agreement Telstra works out with the new company," said Ratia. "I'd imagine Telstra wouldn't want to pay any more to use infrastructure it used to own, so I doubt any increases in prices will be passed on to its customers."

Competing providers and ISPs have responded to the Telstra move without a great deal of concern. Vivanet CEO Cardy Chung said that, despite the fact that Telstra is one of many suppliers of network services, he believes there will be few implications for the Vivanet business.

Local telco service provider Powertel's CFO, Shane Allan, agrees that Australian ISPs are unlikely to suffer from Telstra's focus on the greater Asian region.

"Its very hard to know the effect this will have on the domestic market," he said. "If demand outstrips supply, suppliers are in a strong position. But there are alternatives coming in - Southern Cross has just come on. Powertel, for example, can connect with the States and Asia through our parent company, the Williams group, and bypass the need to use Telstra."

"It's the first time Telstra has done something material in this area, and put a stake in the ground," he said. "Most of the major telcos in all the deregulating countries are looking for a growth story and are looking overseas to do it. The strategy is good, the real difficulty will be in execution."

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