Telstra, PCCW put Reach behind them

Almost ten years to the day since it was formed, the troubled Telstra-PCCW JV Reach is being wound up as a major Asian capacity provider.

The two telcos announced today they had agreed to distribute most of Reach's international bandwidth and other assets between them.

Telstra said it would record an initial A$50m ($49.8m) accounting gain on the deal, and another A$80-A$100m on completion.

The companies would not disclose which parts of Reach’s network were being returned to the parents, but said Reach would continue to manage “certain assets” for both PCCW and Telstra.

“The restructuring is expected to result in a clear division of the majority of Reach’s assets and operations, aligning with the respective needs of each of Reach’s shareholders,” PCCW said in its press release.

“The company is expected to benefit, operationally and financially, from the restructuring of Reach through increased operational efficiencies, which are expected to contribute towards a better operating margin and an enhanced competitive position in the market for international connectivity services.

“Further, PCCW is expected to benefit from a recovery of certain assets that were previously invested in Reach.”

Telstra International’s regulatory chief, David Aitken, said it was “better to be master of one’s own destiny.”

Reach’s main assets are the Reach North Asia Loop (RNAL), Australia-Japan and Southern Cross cables. It also owns capacity on APCN2, Sea-Me-We 3, China US and the trans-Atlantic Apollo system.

The agreement all but ends an unhappy partnership between the Australian and Hong Kong incumbent telcos. The two approached the original deal – struck at the height of the dotcom boom – with radically different plans.

For Telstra, the hook-up with PCCW, in which it also bought its mobile arm CSL, allowed it to establish a footprint in fast-growing Asia. But for PCCW, which had just borrowed heavily to acquire the old Cable & Wireless Hongkong Telecom, it was a means of laying off some of its $5b in loans.

Additionally, according to former Reach executives, Telstra International had based its deal on unrealistic projections of the market for international bandwidth.

Compounded with the dotcom meltdown, this meant that Reach's older and small cables were competing with new high-bandwidth subsea cables selling at a much lower cost.

In its early years, as bandwidth prices went through the floor, neither of its parents felt bound to buy exclusively from the JV.

In the last restructure of Reach six years ago the company said all of its inventory would be consumed by Telstra and PCCW.

However, Reach’s greatest service to its owner over the decade was not as a bandwidth provider but as a means of enabling them to slash their debts. In a 2004 deal bankers settled for just $311m of the $1.2b that the two telcos owed them.

The distribution of Reach's assets is expected to be completed in the first half of 2011, Telstra said.