Pumping up the CyberWorks
By Michael Sainsbury, InformationWeek
Friday, August 04, 2000
Telstra is ready to embark on its grand Asian adventure after its partner in the $6.5 billion scheme - Pacific Century CyberWorks
(PCCW) - received approval for a US$26 billion takeover of Hongkong Telecom on August 1.
And far from playing cautiously on the deal, which caught local industry-watchers unawares back in mid-April, Telstra now looks
set to expand the relationship with PCCW further.
The partners are already in talks about building data centres together - on top of the original plans to build regional mobile
networks and an IP backbone - while business-to-business (B2B) joint-ventures look increasingly likely.
For its part, PCCW is hardly shy. The Hong Kong-based Internet giant has sweeping ambitions - ambitions that span the globe. It
wants to play in every part of the Internet puzzle: From content to backbone, from mobile to broadband, PCCW will be there. And
the company wants customers spanning corporates to consumers.
It wants to play the venture capitalist game, as well as that of the property developer, in order to foster and house its on-line
offspring. And in Telstra, PCCW believes it has found the right partner to add to already substantial regional muscle. Signing a
partner of Telstra's stature was a necessary precursor to PCCW's global ambitions.
Talking exclusively with InformationWeek, PCCW managing director Alex Arena said the newly-merged PCCW-Hongkong
Telecom would be divided into eight separate business units, two being the joint-ventures with Telstra (a global IP backbone
company and a regional mobile company), the other vertical business units will be in B2B, content, fixed line and data centres.
"We are taking the two companies, PCCW and HKT, and disassembling the pieces and reassembling them," Arena said. "We
end up with a structure of six business units. Some of these will end up being their own standalone companies. Then, underneath
these, we have two horizontal units, one on ventures and one on infrastructure."
These two other units are PCCW's ambitious Cyber Ventures and Cyberport venture capital and property investments
respectively.
But Arena denies that the company is spreading its energies across too many diverse industry sectors. "That's the advantage of
having clear vertical delineation’s in the company. You can see most of our business units are substantial companies in
themselves, with their own management and their own ability to fund their activities.
"It's not only the question of seeing what works, that's part of it, it also allows you to be flexible according to how the market
develops," Arena added.
"You can change your game plan, and being able to do that can often guarantee survivability in a rather turbulent time. But it also
enables us to extract synergies by running several of the pieces," he said.
But why Telstra?
"It came down to number of things," Arena says. "They approached us while we were in the early phases of deciding what to do
with Hongkong Telecom - and I guess the fact that they approached us was one of the reasons why we selected them. Had they
not approached us, we may not have seen them as a natural partner. But they came to us with a proposal and were basically
speaking our language."
Share Price Transformer
A recent HSBC Securities report described the new look PCCW as transforming "Hongkong Telecom into a set of new entrant
businesses sharing an equity-backed alliance [with Telstra] rather than an incumbent telco facing declining revenues". Hong Kong
analysts are very bullish about the combined PCCW-HKT entity's stock price, predicting a share price of as much as HK$35 -
compared to a current PCCW price of HK$15.
And to hold it all together Arena said: "at the top of the company, we will have a core team that is responsible for portfolio
management. That is expected to be the brains trust.
"It will form the strategy of where we want the company to go, and where we want to form certain partnerships, or exit certain
businesses; how we are going to finance the company as a whole. It's quite an orthodox sort of management style but applied to
a New Economy company."
PCCW is the brainchild of Richard Li, 33, the second son of Hong Kong's richest and most powerful tycoon, Li Ka-Shing.
Li junior has already built up and sold - to Rupert Murdoch for a motza - Asian satellite TV group Star.
The proceeds from this sale were used to build Li's CyberWorks dream - a dream which may well have been caught in the
mid-year cybercrash, had it not been for the success of his audacious bid for Hongkong Telecom. The bid gazumped the
combined dollar power of Singapore Telecom and the Murdoch-powered News Corporation, stunning the region's corporates.
As well as Telstra, which will have about two percent of the new company once it exercises its US$1.5 billion convertible note,
PCCW has a bunch of other heavyweight investors.
Leading the pack is Intel, the world's largest chipmaker, which has bought more than four percent of the new company. Following
Intel is mega US-listed Internet investment outfit CMGI with 3.5 percent.
CMGI has 60-70 US-based Internet investments, including AltaVista. It also has a US$1.5 billion investment fund with CMGI. And
the Chinese Government, of course, gets a slice of the pie via a 5 percent stake through its state-owned China Telecom.
"Because we are doing so much with Telstra, for an alignment of interests we have them in the top company. To become a global
player in anything you have to have some strength and some market position," Arena said.
As one senior Telstra executive admitted: "People in Australia don't understand this [PCCW] deal. It's all about Hongkong
Telecom."
And Arena added: "They [HKT and Telstra] know each other, and they have been working together for decades."
"This enabled us to move from a position of strength to a position of regional strength. The fact that we are in the same time zone
is also important in being able to build a business together."
The Family Way
The companies have agreed to work in a number of areas, with the two initial major ventures being to form a global IP backbone
network, and a regional network of mobile telephone operations.
PCCW is also already one of Asia's biggest venture capitalists. It has plowed more than US$800 million into Asian online
investments - a number which exposes as "limited" the ambitions of the Packer group in Australia.
A number of these PCCW investments have extended to Australia, with the company taking a recent stake in ASX-listed online
security firm, SecureNet.
"We have had that investment through [SecureNet's joint-venture with] Hongkong Telecom for a year or more, but we have now
expanded that effort to be Asia wide, with an investment stake of 15 percent of Securenet itself," Arena said.
"Where they are strategic partners, we look for alignment of interests. Particularly where we are creating value. We did the same
thing with (our joint-venture with) Spike. It has a set of assets that are important, particularly its Japanese assets. We want to
build a business with them, and in building a business, we create value, and that value is realised at the parent company level.
"We kind of believe that we should take a stake at the parent company level where we are developing a strategic vision level."
It seems, too, that Li has not forgotten the lessons learnt on his father's knee, and the centuries old business mantra in Hong
Kong; without property, you are nothing.
Just as Li Ka-Shing has turned his flagship Hutchison Whampoa into one of the world's most aggressive mobile phone
companies, his son is adding a property layer to his multimedia shop.
No doubt using the family's huge sway with the Hong Kong authorities, PCCW has formed a project with the Government to build
Hong Kong's answer to the Malaysian multimedia corridor - the so-called Cyberport project.
"We invented it, and we took the idea to the Government," Arena said. The project is a commercial/retail/residential complex of
over six million square feet, the equivalent to six of Hong Kong's towering 50-plus storey office buildings.
The Government donated the land and PCCW will build and sell off the residential component to finance the project.
Profits will be split with the Government on a roughly 50/50 basis depending upon how much PCCW spends. At present it looks
as if PCCW will outlay around US$1 billion and almost as much in profit is expected for distribution to the partners.
Arena says that the PCCW holding company, Pacific Century Group, is building a US$1 billion property on top of a Tokyo railway
station. "We are very bullish on Japan," he said.
This has been highlighted by the recent news of the company's investment in Japanese cable company Tomu whose territory is
set to expand to cover two million homes.
Bang For The Backbone
Telstra and PCCW's first priority is their IP backbone 50/50 joint venture.
"We have about 24 POPs (points of presence) around the world", Arena said.
"In Asia we are pretty comfortable that this will be number one in terms of capacity and traffic. The only other significant players
are NTT, KDD and SingTel. HKT and Telstra are number two and three in the region. In the announcement we made we said we
would keep the option open about bringing in other partners. Our position has always been that this is a global play."
Arena doesn't rule out a partner from the US or Europe, but HSBC believes the group will pull in a Japanese equity partner first
before going farther afield.
HSBC estimated that the IP Backbone company currently has revenues of US$1.7 billion - more than Global Crossing - over
1.2Gbps of Internet capacity and five billion seconds of traffic per annum and it will have 24 POPs. HSBC values the company at
US$8.4 billion.
Arena said: "This is a private company, but we have said that we will try and put it together and take it to the public markets in
around 12 months."
The other firm venture between Telstra and PCCW at this stage is a regional mobile company. PCCW will tip in the HKT mobile
business, currently ranked number two in the territory behind Hutchison, but with the highest average revenue per user (ARPU)
as well as its 15 percent share in Singapore's number two operator M1. Telstra will contribute its 49 percent stake in Modi-Telstra
in Calcutta and its 60 percent stake in Sri Lanka's Mobitel as well as a US$1.5 billion cash payment for 40 percent of the
company.
Arena said: "We said we would build up a regional brand. We will build the business through a combination of owning physical
infrastructure, particularly where we can get entry at reasonable prices and doing it on a virtual network basis, that allows us to
play at the service level as well.
"The world is evolving in this space. Look at what's happened with DoCoMo's iMode in Japan, and WAP and 3G and GPRS.
That's going to require some investigation.
"We are still in discussion with Telstra about how do we go into the new economy kind of mobile device; whether it's a Gameboy
or a PDA with broadband on it," Arena mused. HSBC is currently valuing the mobile business at US$7.1 billion.
There has been much carping in Australia about Telstra losing management control of its assets. Now, both companies will be
headquartered in Hong Kong, (a more rational geographic location for pan-Asian businesses, Arena said they would have
independent management). There will also be re-branding. "I think ultimately you have to develop specific brands particulary if you
are going to develop a global brand."
Telstra is also talking to PCCW about its data centres and B2B units. While nothing has been finalised they are the new pieces in
the Internet puzzle.
Arena said that data centres were like the train stations where customers and the network meet. The company is already rolling
out a network of data centres across Asia in places like Singapore Taiwan, Shanghai and Beijing. PCCW will probably be aiming
to plonk a data centre on every POP on the IP backbone network, so a Telstra partnership on this would make sense.
The final, and perhaps riskiest, business division in PPCW is that of content. And this is perhaps Li's most ambitious play - a
worldwide broadband/television content service called Network of the World. Before the HKT bid, much of the business rested on
the success of this.
But has Li has put together the right network of infrastructure delivery networks for the project closest to his hand? With Telstra's
help, it just might fly.
