Broadband threat to Telecom

By PETER GRIFFIN

Telecom is concerned that the global glut of broadband capacity may hit the value of its international broadband assets and limit Southern Cross Cable's ability to repay debt to shareholders.

Telecom reported a $188 million loss on Friday for the year to June 30, the first time the company has plunged into the red.

But earnings before interest, tax, depreciation and amortisation (ebitda), a key indicator of the strength of cashflows, improved 9.4 per cent.

Telecom said in its financial accounts that there was already an oversupply of broadband capacity on some global routes, a situation that would force down prices dramatically if excess capacity was sold at "liquidation prices".

"Were such a development to occur and prove other than a temporary situation, it could result in potentially significant impairment of Telecom's international network capacity assets," Telecom's financial notes read.

Telecom has provided debt funding of US$60 million ($130 million) to Southern Cross Cable, which runs the cable linking New Zealand and Australia with the US.

Telecom has a 50 per cent stake in the cable, with SingTel Optus holding 40 per cent and McI WorldCom, a 10 per cent share.

Telecom spokesman Andrew Bristol said the money was paid to Southern Cross in the form of a "long-term shareholder advance" and that Telecom ranked behind banks, which had also lent money, in terms of having the money repaid. Bristol could not say when that was likely.

Telecom has a substantial amount of capacity on the cable, holding a book value of around $260 million. The telco also has a commitment to buy more capacity over the next three years at a cost of $180 million.

Telecom believed future revenue flowing from the capacity would exceed the investment made.

But Sydney-based telecoms analyst Paul Budde said it could be up to five years before sufficient demand for broadband existed to begin delivering returns on investments in the submarine cables that criss-crossed the world.

"What makes it worse is that quite a few companies are going broke, so you're getting price dumping," he said.

Budde added that the consolidation in the market with the fall of companies such as Global Crossing and WorldCom would act to slow the fall of broadband prices and control of infrastructure would revert to cartels of international carriers.

Budde was not surprised about Telecom's move to write down its $133 million advance to AOL7, the Australian internet provider in which Telecom has a 30 per cent stake.

He said AOL7 was falling further behind in the Australian market as it struggled to match offers by competitors concentrating on the broadband market.

"AOL has huge problems with delivering broadband, they still operate in a narrowband environment.

"They are not growing to the level that would justify the investments made," said Budde.

Southern Cross Cable chief executive Fiona Beck was not available for comment.