Telstra Corporation Ltd. (TLS), the telecommunication service provider, has entered into a definitive agreement to buy Singapore- and Hong Kong-based internet services company Pacnet Ltd for US$697 million. This comes at a time when the cash-rich Australian telecom groups are expanding in Asia.
Through the deal Telstra aims to achieve the ability to provide internet protocol virtual private network services in China and ownership of 46,000km of undersea fibre networks and data centers across the region.
“Asia is an important part of our growth strategy,” said David Thodey, Telstra chief executive. “We believe this acquisition will help us become a leading provider of enterprise services to multinational companies and carriers in the region.”
Telstra reportedly has designated about A$5 billion for its Asian plans. The company has taken many an expert by surprise, especially if the size of the company is to be considered. The company has of late been making significant investments and growing by leaps and bounds in the region. A recent study by analysts found that approximately 9% of the companies in Australia are either currently invested in Asia or hold interest in doing business in the region. About 65 per cent have no intention of changing their stance in the next two to three years. Cultural differences are cited as a key problem.
Every year Australia’s miners sell tens of billions of dollars of iron ore and coal in China and Japan. There also are many companies that outsource business functions to Asia. But Australian companies have invested a mere A$28.2bn (US$22.9bn) in Asean. Telstra, which has been doing business in Asia for more than 70 years, generated less than 10 per cent of its A$23.6bn revenues in 2014 in Asia. But the company said on Tuesday it was still seeking opportunities across the region after its purchase of Pacnet.
Pacnet generated revenues of US$472m and earnings of US$111m in the year to the end of December 2013. The company owns Asia’s largest submarine cable network and the Trans-Pacific cable system linking Japan and California.
Telstra and other Australian companies are taking an advantage of the lax in the trade agreements in the South Asian countries, especially in v South Korea, Japan and China. These agreements, the experts believe, are milestones that will open up opportunities across the region, particularly for food and agricultural groups.
Telstra, along with a few other Australian companies have in the past tried to enter the highly volatile Asian market. In doing so, the companies have borne the brunt of the market volatility. Therefore, this attempt by Telstra, has made the investor community very cautious.
“Australian chief executives in listed companies tend to set short-term goals as they stay in the job on average about four years,” says Mr Parker. “Asian company management think long term.”
“Australia can choose to be more than a farm or a quarry,” says Mr Parker. “Asia will be producing half the world’s total economic output within 10 to 15 years. There are big opportunities.”
These risks that the company is taking needn’t worry the investors much. The Asian market is currently the fastest growing economy of the northern hemisphere. The company closed at $5.96 a share on Monday. The company has a market cap of $71.53 billion and P/E ratio of 16.56. The company is paying 4.95% on investment. All I all, I would rate the stock a buy.
