Clifford Chance Telecoms Seminar

Fixed telecoms market – ‘Still Delusional’

22 May 2003

Robert Kenny
Past acquisitions in Asia have been disappointing

• Almost all attempts to be everywhere have failed

– Service providers : Global Crossing, Concert, FLAG
– PTTs : C&W, BT, RBOCs
– Mobile : Some exceptions - Vodafone, Hutch?

• Surprisingly few international synergies

– Few scale benefits, few real competitive advantages

• Regulation in Asia has typically allowed only minority stakes, further limiting
synergies

• New entrants everywhere have had a hard time (with or without existing
operations overseas)

• Capital shortages forcing reassessment of ambitious plans

– Level 3, Global Crossing, BT
A history of delusion

Period Deluded Delusion Reality

1980s New entrants Telco monopolies have made Monopolies are a good
great margins  telecoms is a business
good business
Early 90s PTTs Under attack at home, so let’s Markets you can enter are
expand overseas competitive, unlikely to give
good returns
Late 90s Everyone Rapid IP growth will create a Rapid growth in units ≠
bonanza growth in $

2003/03 Would-be Cents on dollar valuations  ‘Assets’ may in fact be

bottom feeders assets are cheap liabilities
Future consolidation and challenges

• Some sectors self-evidently require consolidation

– Many mobile markets
– Asian sub-sea capacity

• Lack of differentiation that is significant to consumers mean all operators

commoditised

• However, practical issues can prevent consolidation

– Debt levels, corporate egos, price expectations, regulation

• Consolidation has been ‘imminent’ in the HK mobile sector for 5+ years

• First deals do not indicate a trend

– Paclink, Level 3 Asia
– Easier deals get done first, later ones are harder
– Regulators may allow leader one deal but not two
Current valuations

• Assets built during the boom are available for 0-10 cents on the dollar

• However, in reality these may be liabilities

– Negative operating cashflow
– Little incremental revenue if overlap with existing assets
– Contingent liabilities (environmental, legal etc)

• Balance sheet problems (massive, unsustainable debts) have concealed more

intractable P&L problems (unviable, value destroying business models)

• Nonetheless, illusion of cheap assets is powerful and attracting new entrants

• Recovery of profitability may need to wait for ‘Chapter 18’

Where is there value?

• PTTs still making money, just less

– Sunk costs, have real revenues

• CLECs mostly struggling

– Dependent on regulatory life support, generally have no differentiation but
price

• Sub-sea will become profitable, but grim now

– Significant barriers to entry (capital) should allow value in time

• WiFi (802.11) has the potential to change the rules significantly

• Huge portion of historic value creation in

telecoms has depended on limited
licences and/or oligopolies
• Industry is still figuring out how to make
money without these crutches