Cable & Wireless looks east
31 Oct 2000
In what will definitely be the largest single investment by a UK company in Japan, Cable & Wireless (C&W), the UK telecommunications group, has announced an investment of $1.4 billion over five years to build an optical fibre network in that country. The investment is in line with C&W's global strategy to focus on the IP and data markets for business customers. The investment will allow the group to take advantage of relatively cheap internet technology, dramatically reduce the cost of its voice traffic and seamlessly link email and traditional phone services.
The network, which is expected to more than triple C&W revenues in five years, will offer high-speed Internet access and data services to business users in competition with local operators, such as NTT. The overall projected revenue in five years is expected to be in excess of $1.45 billion.
The implementation of the project is to be done through C&W’s, recently acquired, subsidiary, International Digital Communications (IDC) -- a Japanese international carrier in which C&W was a founding shareholder. The investment would see the workforce at IDC double over the five-year period.
The investment will extend C&W IDC's network to 80 cities in all 47 prefectures in Japan, and will nearly treble its data centre capacity to 32,000 square metres. The number of internet access nodes will be increased from 40 to 160.
This investment will put C&W in direct competition with Japan's large incumbents, most of whom have a significant head-start in building optical fibre networks. NTT, for instance, already has completed the transition of its backbone to optical fibre and has completed about 35 per cent of the work from its office to feeder points.
The Japanese market for IP and data services business is estimated to be worth $11 billion and is expected to grow at least 20 per cent a year for the next five years. The market for overall IP and data services is forecast to overtake the traditional voice market by 2003. Japan is the second largest market in the world for telecommunications services. For C&W, Japan is a strategic hub in Asia and is one of four key markets for global IP and data services, alongwith the US, UK and mainland Europe.
C&W is also likely to leverage its 11 per cent investment in Garnet Communications, a digital subscriber line (DSL) operator, to roll out its IP and data products quickly.
In the past 18 months C&W has transformed from a loose federation of unconnected phone companies into one of the world's main carriers of high-speed internet traffic and a global player in the Internet protocol group. It has achieved this through a series of acquisitions and divestments made by current chairman, Mr. Graham Wallace. As a result, C&W has come to occupy a unique position among global telecom companies. With around 4 billion of net cash on its balance sheet, C&W will, probably, be the only global telecom company without any debt on its balance sheet.
However, C&W’s transformation into a leading player in the data transmission business has not been without pain. The company has made several divestments for which it has been part-paid in stocks. Most of these stocks have fallen sharply in value.
Most serious of these, is the paper loss of over 5 billion on the sale of Hong Kong Telecom to Pacific Century Cyberworks (PCCW) in Hong Kong. This has undermined the value of Cable & Wireless itself, which closed yesterday at 964p, off 16p, and down from a peak of 15.62 reached at the time the deal was struck in February. The Hong Kong Telecom deal was originally worth 13.3 billion but was yesterday worth around 7.7 billion.
This was a result of PCCW shares being caught up in the bloodbath of Internet stocks. At the end of February they were trading at HK$22.15 but yesterday they were trading at HK$7.69. Under the terms of the deal, C&W received 4.3 billion in cash up front and a 20pc stake in PCCW. The company sold a quarter of the shares last month for 935m, but is still hanging on to 3.3 billion shares worth 2.3 billion – shares that were worth 6.6 billion eight months ago!
