trading halt, page-2

From BusinessSpectator.com.au:

Commentary
9:39 AM, 2 Dec 2008


Tony Boyd

Funding blockage

The possible death of a proposal from Pipe Networks to lay an undersea cable from Sydney to Guam will spell the end of a brave attempt to break the duopoly control of internet traffic between Australia and the United States.

Telstra and Southern Cross Cables, which is owned by Telecom New Zealand, Optus and Verizon, will be glad that competitive pressure for lower cost internet data transmission will be removed.

The failure of Pipe to secure $200 million in bank financing for its 6,700 km submarine cable from Sydney to Guam raises doubts about the ability of other telco infrastructure providers to get funding.

If a company that was confident of obtaining more than 20 per cent of the share of wholesale internet traffic between Australia and the United States within four years can't get the support of Australian banks for $200 million, what hope is there for the $5 billion National Broadband Network bidders?

Pipe told the Australian Securities Exchange it may have to take a $30 million hit to its bottom line if it is forced to withdraw from the undersea cable project called PPC-1. It shares are in trading halt until Thursday.

The company is in discussions with its key PPC-1 customers and its major supplier in a bid to come up with an alternative financing proposal. Negotiations with those parties are “confidential, ongoing and incomplete in nature” but are expected to conclude within a few days.

Pipe has been working on the PPC-1 project for several years. It housed the project in a special purpose subsidiary based in Bermuda. The financing from a syndicate of two Australian banks was to be non-recourse to the parent. Pipe did not name the banks, but its own banker is ANZ.

If Pipe pulls out of the Sydney to Guam project it will report a net profit of $8 million to $9 million in the year to June 2009, excluding the non-cash write off of $30 million. It had previously forecast a 50 per cent increase in net profit in 2009 from $7.2 million to more than $11 million.

However, if the project does not go ahead its debt will be about $27 million, instead of drawing down its debt facility to the maximum $40 million.

Internet traffic between Australia and the US has been controlled by the Australia-Japan Cable, which is partly controlled by Telstra, and Southern Cross Cable. Southern Cross has been significantly upgrading its capacity this year.

Telstra this year entrenched the duopoly by laying its own 9,000km between Sydney and Hawaii. It is due to open before the year-end. When Telstra launched this project it highlighted the higher internet speeds, improved security and larger range of services. It never mentioned the possibility of lower cost data.

In contrast, Pipe's value proposition has been all about slashing the cost of data transmission. It has claimed that Australians pay 20 times more for data than residents of Japan.

It had expected to have sales of $60 million on its PPC-1 cable.

Pipe will survive without PPC-1. It has established a sustainable business based on its one million metres of fibre network that connects Brisbane, Sydney, Melbourne and Adelaide. Its traffic grew by 500 per cent last year. It plans to connect Perth to the network.

But if its customers and major supplier cannot find the funds to finance the completion of the cable Australian internet users will be worse off.