Last month we learned that Indonesia’s PT Telkom was looking seriously at a bid for Pacnet. Then Pacnet sent CEO Bill Barney packing in a surprise move alongside rumors that he had differed with the company’s private equity owners on a sale. It looked like PT Telkom was all set to gobble up the regional submarine cable operator, but apparently it was not to be.
Reports this morning quote a Telkom representative unequivocally canning the idea, saying “We cancel our plan to buy Pacnet because it doesn’t bring added value to the company” which doesn’t sound much like a new negotiating position. In many ways a merger of PT Telkom and Pacnet made more sense than other potential combinations due to the regional fit, but there are others out there. If the Pacnet’s private equity backers have had enough, then who might they look to next?
My first guess would be NTT, which has made much out of its purchase of PC-1 and could take this opportunity to beef up its overall regional assets. Another Asian-based possibility could be Tata Communications, which we know is at least looking given their attempt at C&W Worldwide. And a third possibility would come from China, as China Telecom itself kicked the tires a few years ago but didn’t pull the trigger.
Perhaps the US-based option would be Level 3, which could become interested in adding Asian reach and scale to its global footprint now that it has the scale it needs in the US to balance its debt. If the price were right, I’m sure they’d consider it. But maybe not for a couple of quarters yet.
Any other serious possibilities out there?
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Categories: Mergers and Acquisitions · Undersea cables
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One has to speculate why everyone who gets access to the PacNet data room either runs away screaming or lowballs their offer.
Key reasons could be:
– that some of their key systems are reaching the end of their economic lives, in the sense that the open costs start to make them uncompetitive compared to some of the newer systems
– that despite the hype about their data centre and enterprise businesses, much of their revenues may be wholesale – which are much less sticky than enterprise
– of the wholesale revenue, how much of this is just deferred revenue from past IRU sales?
– PacNet’s Asia system – HK, KR, TW, JP and especially HK-SG – used to be a real differentiator. Not so much anymore. Companies can built pretty good patchwork solutions these days and/or invest in some of the mooted new systems, so why bother with PacNet?
With Barney gone, PacNet’s owners are probably now getting a good dose of unmediated reality as to what their company is really worth – a fact that everyone else in the industry has known now for, literally, years. The common cocktail party talking point of the entire industry for the past decade as PTC/ITW has always been “How does Bill Barney get away with it”? It’s a way of breaking the ice with industry colleagues you don’t know too well.
My guess is that PacNet will be sold off in pieces. That process can start once its owners realise that their investment is no longer worth very much, and that this value decreases by the month.
Nice thoughts fluids. But now I’ve gotta ask. How much *do* you think Pacnet is really worth?
If they broke it up in pieces – the fibre pairs in Unity (trans-Pacific), then North Asia and Singapore, then the enterprise business … maybe 300-400m.
Net of debt? Just what you could buy the capacity for, there’s no real value to the rest of the business and there’s a lot of debt. $300M is probably the upper limit of what is achievable, and perhaps significantly less than that. Their EBITDA is $90M pa, even 3x that feels generous as a valuation. The mooted $1Bn was as unlikely as the valuation Reliance gives their RGC business…
Yes, $1B always seemed over-the-top, but I’ll bet their owners would not be happy at all to settle for $300M. They’d surely be taking a big loss if that turned out to be the case. The company’s financials are opaque to me, so it’s really hard to judge.
Perhaps the optimal buyer would be one who wants to enter the region at a reasonable scale and with relationships in place.
Not if it’s cheaper to buy IRUs, a cable pair or even lease. Ashmore made a bad investment, they just need to walk away with whatever they can get before it goes under.
Also ring cable systems are unattractive from a network engineering perspective.