Who’s got $360 million? Four potential Hawaiki investors rated

Can Hawaiki succeed where Pacific Fibre failed?

The New Zealand-registered Hawaiki, founded by expatriate Frenchman Remi Galasso (who declined comment), is trying to raise $360 million for a new cable between Australia, New Zealand and the US, which would break the 50% Telecom-owned Southern Cross Cable’s monopoly as our only major broadband connection to the outside world.

The 50% Telecom-owned Southern Cross Cable is New Zealand's only major broadband connection to the outside world. CEO Anthony Briscoe says it has bandwidth to burn for the age of cloud computing and Netflix, and a figure-eight, twin-cable design for security. Hawaiki boosters say a rival cable is the only way to ensure true price competition; all that international capacity is for naught if ISPs skim on bandwidth because they find it too pricey.

Hawaiki s getting a lot of industry and political buzz, most recently for its announcement this week that data centre company Equinox will let it use its landing site in Sydney.

It's has made a string of announcements about suppliers, including US company TE Subcom, which would lay its 14,000km of cable.

And a laundry list of ISPs have signed (non-binding) letters of intent to buy bandwidth, should the cable project eventuate.

But all of this means nothing, to be blunt. TE Subcom will take any project that throws hundreds of millions in its direction. And Equinox will be just as happy to partner for the right price.

Pacific Fibre also lined up TE Subcom and a similar list of ISPs (in fact Hawaiki is disadvantaged on that front, as Telecom, Telstra and Vodafone have committed to their own Tasman Global Access cable between Auckland and Sydney next year, so are not about to buy bandwidth on any competing venture).

Pacific Fibre also had ANZ lined up to debt-fund 45% of its $400 million build – but it was contingent on equity investors coming on board. Its slate of anchor customers was not enough (like Hawaiki, all its ISP support letters were non-binding).

So it all comes down to equity investors. After talking to industry observers, NBR has identified four.

1. Todd Corporation

Late May, rumours swirled that Todd Corporation was about to invest in Hawaiki. A statement was being drafted, Mr Galasso said. Said statement has yet to emerge (Todd spokesman Mike Munro would not comment.

Entrepreneur and Pacific Fibre alumnus Lance Wiggs describes the Todd family as “the ideal investor” for Hawaiki.

Certainly, it ticks a number of boxes.

It has money. Last year’s Rich List estimated the wealth of the Todd family, which owns and controls Todd Corporation, at $2.9 billion. The family realised a healthy $218 million when it sold its 11% stake in Sky TV last year. And Hawaiki wouldn’t even be close to its largest investment (which in recent times is bankrolling a $US1.3 billion methanol plant in the US state of Louisiana. The joint venture development due to be constructed later this year).

And it’s not afraid to make big and, at times risky, bets in the tech area.

The Todd portfolio has previously included large investments in Clear Communications (neutral), Australian telecommunications wholesaler AAPT (a big success as Telecom paid far over the odds to acquire it – though Todd will be keenly aware there may never be another terrestrial broadband bubble of the type we saw in the late 1990s), Woosh Wireless (a wipeout) and the aforementioned Sky TV.

Another pro-Todd angle comes from Sydney-based telecommunications market analyst Paul Budde, who 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,” he tells NBR.

“These exploration companies are now also requiring fibre access and as such they can be excellent anchor tenant of such projects.” Off the west coast of Australia, there are three potential energy company-cable company joint ventres for laying fibre up to Asia, he says.

Mr Wiggs won’t comment on who Pacific Fibre approached or didn’t but it’s hard to see how you could go past the family that looms so large over New Zealand’s private investment landscape.

So you have to ask: if it’s interested in submarine cable, why did the Todd family not back Pacific Fibre’s bid to raise $400 million?

Pacific Fibre was backed by Rich Listers Sam Morgan, Sir Stephen Tindall and Rod Drury – all with strong political and tech industry connections, a capable team of managers (including Mr Wiggs, ex Vodafone exec Mark Rushworth and ex Telecom broadband infrastructure guru John Humphrey) and it was just as far down the track as Hawaiki – in fact further given it had Vodafone onboard, and that ANZ commitment to debt-fund 45% of its build.

And Hawaiki faces a much tougher fight for funds. The GFC has lifted but 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 (by dint of being able piggyback on Southern Cross Cable landing sites).

Ex Pacific Fibre chief executive Mark Rushworth told NBR New Zealand traffic would amount to under 20% of his company’s forecast revenue (earlier this month, Southern Cross told NBR its total was closer to 15%). Pacific Fibre’s business plan hinged on signing up Australian clients but with a second transtasman cable already on the way, that will be harder yards for Hawaiki.

2. The government

The government has had a $15 million international bandwidth contract up for grabs for several years now. The money can only go to a new cable operator but it’s chump change in the context of the $360 million to $400 million required for a new Australia-NZ-US cable (and bear in mind the law of big IT project and big infrastructure projects running over budget. 

Mr Wiggs says the Crown should look beyond an anchor customer contract and get some skin in the game.

“Why not take little bit of Mighty River Power or Meridian cash and invest as a straight equity partner?” he says.

You can make a case for a Crown investment, or a public-private partnership. In fact, the Pacific Fibre co-founder has, in articulate and detailed fashion, to ICT Minister Amy Adams and others in the government’s inner circle. But for whatever reason, the phone is off the hook. The cabinet is buying Southern Cross’ argument that it can provide all the bandwidth New Zealand needs for the UFB age and that it’s doing so at a competitive price with its New Zealand rates pegged to those it charges in the more competitive Australian market (where ISPs and others have a choice of six international cables).

My sense is Ms Adams and Steven Joyce aren’t playing coy ahead of some kind of pre-election big cable announcement. There just wasn’t interest there and I suspect the Chorus controversy and UFB cost over-runs have reduced their enthusiasm for any new big broadband spending.

If the government does have fears about an international cable cost blow-out, Southern Cross Cable CEO Anthony Briscoe isn't about to calm them down. He tells NBR that if his company had to rebuild its Australia-NZ-US cable today, it would cost $900 million to $1 billion.

The cable boss has an obvious self-interest in putting a high build cost out there, but the Crown will also be wary of the fact that major IT infrastructure projects have a history of busting their budgets.

3. The Super Fund

This is just the sort of deal the Super Fund should be involved in,” Mr Wiggs says. The Super Fund

It would be helping a New Zealand company, New Zealand business as a whole and, long term, provide solid returns.

However, that doesn’t seem to be the way the Crown agency has seen things so far.

After Pacific Fibre folded its tent in 2012, the government’s Super Fund was reported as saying it would have been “too risky” an investment.

Super Fund communications head Catherine Etheredge says that was paraphrasing and an over-simplification.

So could the Crown fund (which now has $25 billion under management, vs $18 billion in 2012), consider a punt on Hawaiki?

Ms Etheredge says the Guardians (as the fund’s managers style themselves) never comment on whether it is interested in investment opportunities or those currently on the table.

More broadly she says, “Under the Guardians’ whole-of-portfolio approach, any new active investment needs to measure up against all other global investment opportunities.

“We also need to have a high level of confidence that the new investment will deliver a better risk-adjusted return for the fund than we would be able to get from a passive, listed alternative.

“For our New Zealand investments, we also require a sufficient return to compensate for the risk of concentrating too much of the fund’s portfolio here. 

“Additionally, as one of only a few investors of scale in the country, we maintain a high level of price discipline.

“Our approach to evaluating investment opportunities has remained consistent over time.”

Most tea-leaf readers would find that neutral leaning negative and bolder soothsayers could interpret that final sentence as: “Hawaiki won’t have any more luck with us than Pacific Fibre.”

One development that might give Hawaiki a glimmer of hope: one-time Pacific Fibre chief financial officer Michael Gleissner is now general manager, corporate strategy at the Super Fund.

Also worth noting in the small world dept: Mr Gleissner’s ex-colleague at Pacific Fibre, business solutions director Todd Sutton, is now business development director for Hawaiki.

4. Iwi

One of the better-off iwi, like Tainui or Ngai Tahu, could put some money into Hawaiki.

The pan-iwi Hautaki Trust invested in 2degrees, trading government-granted 3G spectrum for a 20% share. But it’s still far from clear that investment has been a success. Hautaki’s 2013 accounts show it $15.2 million in hock to 2degrees’ majority owner, US company Trilogy International. Hautaki has borrowed money from Trilogy in an unsuccessful 2012 attempt to keep up with new rights issues that has seen its holding diluted to 10%.

A modest investment in Hawaiki is possible but I don’t see any iwi betting the farm. Following the failed 2012 drive to sign on new iwi invetors, Hautaki director Anthony Royal told NBR that a long term technology infrastructure investment was seen as too risky. More traditional iwi investment areas like forestry and fisheries where returns are more reliable.

Still hopeful
Mr Wiggs is still hopeful someone will come onboard and support Hawaiki.

“Maybe we were too early,” he says of Pacific Fibre.

And while fellow Pacific Fibre veterans Rod Drury and Sam Morgan think no one will follow in their commercial footsteps and that a public-private partnership is the only realistic shot, Mr Wiggs says “I’m still a big believer in the investment case.”

It just needs an investor who’s comfortable with a long horizon, and that could be the Super Fund, or Todd.

If they do come to the table and help Hawaiki, “I hope we [Pacific Fibre] were at least the catalyst,” the entrepreneur says. “I’m certainly hopeful we may have contributed to Todd Corp thinking; if that’s all we did.”