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Will Todd invest in Hawaiki's $360m cable? The case for and against

Todd Corporation won’t comment on industry rumours it’s going to invest in Hawaiki Cable.

So I’ve created this handy list of the case for and against.

Hawaiki, founded and 100% owned by ex-pat French telecommunications exec Remi Glasso, now resident in Queenstown, wants to raise around $US300 million ($NZ360 million) to lay a 14,000km submarine fibre optic cable between Australia’s east coast, NZ, various Pacific Islands, Hawaii and the continental US west coast.

Mr Glasso has been trying to raise funds for a trans-Pacific cable since 2007, initially through the Noumea-based Spin Network.

FOR: The Todds have the requisite financial muscle. Investing through Todd Corporation, the NBR Rich List family has amassed a fortune of $2.9 billion

Todd Corp is best known for big investments in energy projects including, in recent times, bankrolling a $US1.3 billion methanol plant in Louisiana in the US, due to be constructed in the second half of this year.

But its varied portfolio has also included a number of relatively high risk tech investments over the years, including AAPT, Clear Communications, Woosh Wireless and Sky TV.

And as a private outfit, it has the wherewithal to make a long term play.

AGAINST: If the Todds think a new Australia-NZ-US cable is a good investment, why did they not back Pacific Fibre in its bid to have raise $US400 million for a Sydney-Auckland-LA cable?

It’s easy to make the case that Pacific Fibre was better-positioned — including the fact it didn’t face a looming Transtasman cable competitor (keep reading).

Pacific Fibre had the same cable contractor lined up as Hawaiki (TE Subcom), a similar mix of Australasian ISPs signingn non-binding letters of intent to buy bandwidth should the cable ever be laid (and was arguably ahead, having Vodafone in the bag), more experienced managers, and debt funding of up to 45% of the cost of the rollout from ANZ, contingent on equity being raised (Hawaiki has yet to announce anything on that front). And its well-connected trio of NBR Rich List founders - Sir Stephen Tindall, Rod Drury and Sam Morgan — hustled hard. 

Former Pacific Fibre CEO Mark Rushworth told NBR that letters of intent from ISPs were nice, but at the end of the equity was all that mattered. And no big investors came forward.

Worldwide, independent equity investors in cable systems are thin on the ground.  Shareholders tend to be telecommunications companies.

Southern Cross Cable’s new CEO, Anthony Briscoe, is of course not inclined to say anything to help Hawaiki’s cause.

But for the record, yesterday he told NBR that if Southern Cross had to rebuild its cable today, it would cost $900 million to $1 billion (Southern Cross makes a lot out of the fact its 28,000km, figure-8 configuration effectively provides two routes between Australia, NZ and the US, offering redundancy if one of the cables gets sliced – as happened early in the company’s life when a ship’s drifting anchor sliced through the cable in Sydney Harbour during a storm.

Sure, the basic process of cable laying is fast and easy (it’s spooled off a ship and laid on the ocean floor), but as Southern Cross staff like to point out, the NZ to US leg is earthquake-prone and includes some of the world’s deepest ocean trenches.

FOR: Even Southern Cross's new boss reckons NZ needs another cable. Currently, we have only one connection to the outside world: the Bermuda-incorporated Southern Cross (50% owned by Telecom, 40% Singel-Optus and 10% by US company Verizon).

Southern Cross says it offers competitive pricing and has all the capacity required for an increasingly bandwidth thirsty, Netflix-crazed and cloud computing-savvy NZ as the domestic UFB fuels broadband demand.

Critics says two players are always better than one for pricing; that we suffer from manufactured bandwidth scarcity; and that NZ needs the security of a second cable operator.

But even New CEO Anthony Briscoe concedes that there’s a problem with the Southern Cross Cable Network only having cable on the increasingly crowded Australia to NZ leg – which means protected traffic has to take a round trip to the US on Southern Cross figure 8 configuration, introducing the problem of lag (or a slight delay, which can throw some applications such as audio and video calls on the likes of Google Hangouts – a pet peeve of one-time Pacific Fibre cofounder Rod Drury).

AGAINST: New Zealand is already getting another cable — at least a second major Auckland-Sydney connection. Telecom, Vodafone and Telstra have formed a joint venture called Tasman Global Access (TGA), which will lay a new Transtasman cable to live next year. The $US60 million project is fully funded, already has permits in place (by dint of being able piggy back on Southern Cross landing sites).

The idea is that once bandwidth buyers have used TGA to hop across the Tasman, from Australia they have multiple cable choices up to Asia or the US.

Mr Rushworth told NBR that New Zealand accounted for less than 20% of traffic under Pacific Fibre's business plan, making it crucial that Australian customers were signed on (yesterday, Mr Briscoe underlined this argument, saying NZ accounted for around 15% of the bandwidth use on Southern Cross).

The Telecom-Telstra-Vodafone cable gives these much-need Australian anchor customers another choice, and makes Hawaiki’s pitch that much harder.

While its three backers are keeping a low profile with TGA, earlier this month a Telecom rep told NBR the project remains ontrack fro a 2015 commercial launch.

FOR: The government will throw some money at a new cable. ICT Minister Amy Adams has reaffirmed the government will pitch in $15 million via Crown company Reannz (which runs the education and research network Karen) becoming an anchor customer on any new cable system.

AGAINST: $15 million is peanuts in the context of a half billion dollar infrastructure project. It’s been on the tale for years, and hasn’t helped other contenders. And we’re talking an anchor customer contract, not a Crown investment. Rod Drury has argued articulately for a public-private partnership, and had the opportunity to pitch ICT Minister Amy Adams, but the government seems to have firmly bought Southern Cross’ line that it’s price-competitive, and has all the capacity NZ needs.

FOR: The Todd Family is open to high tech investments. The family’s portfolio has previously included large investments in Clear Communications (neutral), Australian telecommunications wholesaler AAPT (a big success as Telecom paid way over the odds to acquire it – though Todd will be keenly aware there may never be another terrestrial broadband bubble of the type we say in the late 1990s), Woosh Wireless (a wipeout and Sky TV (where it realised a healthy $218 million for its 11% stake).

It’s showed daring (Clear,  Woosh,  and Sky TV were worth a punt, but their success was by no means guaranteed), determination (Sky lost money for years) and savvy (while Todd never commented on why it excited high-riding Sky last year, it was widely taken to be an early recognition of the growing threat posed by so-called over-the-top content providers such as Netflix).

AGAINST:  Again, it’s already had the opportunity when Pacific Fibre equity was on the table. What's different now, beyond the fact Telecom, Vodafone and Telstra have hatchedplans for the Tasman Global Access cable?

FOR: Sydney-based telecommunications market analyst Paul Budde recently released research that found energy and resource companies and cable operators actually make good bedfellows.

“There are new models emerging. Oil and gas exploration and telecoms can go hand in hand,” Mr Budde tells NBR.

“These exploration companies are now also requiring fibre access and as such they can be excellent anchor tenant of such projects.”

AGAINST: Mr Budde’s report focussed on the west coast of Australia, where three different consortiums are now vying to lay a cable up to Asia. There's no Todd energy or exploration project that's crying out for submarine fibre from Hawaiki (at a strech, you could note that Todd does have an interest in Crest Energy, which has proposed a tidal power project in Kaipara Harbour — currently in approval limbo).

And again, we’re talking anchor customer, not equity player.

In Mr Budde’s view, Southern Cross is still creaming it (50% owner Telecom reported a $43 million Southern Cross dividend for the first half of FY2014).

“There is a lot of activity in this market and that clearly shows that the appetite for local broadband is also having its effects on the international market,” he tells NBR.

“Submarine cable  access down Under is often 10x more expensive based on comparable calculation over an Atlantic cable — where there is so much more competition.

“So obviously this does attract investors, there is a lot of money to be made.

“Nevertheless history shows that it is a risky business as prices can be dropped significantly by the incumbents.”

Southern Cross Cable dropped its pricing sharply as Pacific Fibre canvassed for capital (Southern Cross said constant price reductions were always on its road map, and will continue. At the same time, ISPs, telcos and other customers are buying more and more bandwidth, which keeps those dividends healthy).

Against this, “New models are emerging,” Mr Budde says, including  the trend he’s seen of energy and resource companies backing cable companies.

“It might be a bit of a long shot in relation to Todd but is shows there are possibilities here,” Mr Budde says.

NBR approached Todd Corporation. Spokesman Mike Munro said the company had no comment.

Hawaiki CEO Remi Glasso did not return a request for comment.

What do you think? Should Todd Corporation have invested in Pacific Fibre?  Click here to vote in our subscriber-only business pulse poll.

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Comments and questions

One thing to remember is it will be significantly debt funded. The equity from Todd is likely to be in the US$40-50m range. Small fry provided they dont have to provide guarantees over the debt.

Why will it be significantly debt funded?

Hawaiki hasn't made any public statement.

The only reference point we have is that ANZ offered to debt fund Pacific Fibre up to 45% of the cost of its rollout - but that was contingent on equity investors and anchor customers coming onboard.

It is a long term asset with regular income from large companies with long term contracts which works well with debt.
But more importantly, the more equity Todds put in, the smaller % Remi retains. You can only value sweat equity at so much.

It's a telco infrastructure play, and we pay high margins for capacity, I wouldn't rule out a carrier overseas prepaying capacity for a debt/equity sweetener, but I agree this is right down Todd's alley. I think yd find behind closed doors that the pacific fibre founders had an inflated view of their value, and what slice a cornerstone investor would get. Demi is a smart guy, he will be all to aware of what went wrong at pacific fibre, has better connections, and I'd be surprised if he trips up. I only wish I had a lazy $50m :).

Agree completely. Demi brings specific industry experience which PF didn't.