Juggernaut Alert: Telstra Jumps on the PCCW Wagon

Pacific Century CyberWorks Ltd. (PCCW) and Telstra Wednesday signed a US$3 billion deal to create the Asia Internet backbone which PCCW plotted out at its inception — a plan that many industry watchers were concerned might never materialize.

As if the PCCW/Cable & Wireless HKT merger wasn’t big enough, Telstra and PCCW will initially form two joint venture companies, a regional mobile phone company and a global Internet protocol (IP) backbone company. As part of its US$3 billion injection into PCCW, Telstra will be issued with US $1.5 billion in PCCW convertible notes. The additional US$1.5 billion will be committed as a contribution to the pan-Asian mobile phone company venture.

The partners plan separate IPOs of the Hong Kong based joint-venture companies in short order. PCCW will own 60 percent of the new mobile company, Telstra 40 percent. The mobile company will own all Telstra, HKT and PCCW mobile assets, with the exception of Telstra’s Australian mobile business. The mobile phone venture, to be based in Hong Kong, will develop WAP and 3G products.

Both Telstra CEO Ziggy Switkowski and PCCW chairman Richard Li were adamant that both the newly formed mobile and global IP backbone company will be brought to market as soon as possible. Li said floating the newly formed companies is part of PCCW’s debt reduction strategy.

Switkowski said the deal brings Telstra into the Asia market while transitioning its revenues to more non-traditional sources, an important move as its traditional telco revenues decline with the erosion of its market share.

Li told his pan-Asian audience that the newly formed IP company will have revenues greater than US IP giant Global Crossing from Day 1. The global IP backbone company plans to be the carrier of choice for data, voice and Internet services in the Asian region, a project that had been in PCCW’s ledger since its inception, and expects to eventally grow into a global player.

At this stage, any ventures outlined in the MOU are contingent on PCCW’s ability to execute its merger with Cable & Wireless HKT, among other conditions. However, Li did not have any reservations regarding the execution of the deal.

“We are turning into an information infrastructure company,” said Li.

While Telstra steps into Asia, PCCW will also get a footing in Australia through the partnership, collaborating to form an service to aggregate Australian content for global distribution and migrating PCCW’s Network of the World (NOW) to Australia.

The two will launch umbrella of business services could include network facilities management, data hosting, ASP ventures B2B e-commerce. The blueprint also calls for a fast-paced expansion through Asia, which the companies say will be fueled by acquisitions and strategic partnerships.

Before it was suspended pending the PCCW announcement, Telstra stock was up 1.6 percent to $7.64. PCCW stock was suspended for the day with an indicative price of HK $15.40 per share given.

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