WIDESCREEN

PRESENTATION
Group-2, Section -1 Australia Japan Cable
Demand for Submarine Cable Systems
 1990-1999: Global Telecom market grew at a CAGR of 10.2% pa , from
USD 348 bn to USD 835 bn
 Two media for transoceanic transmission :
 Submarine Cable Systems
 Satellite Transmission
 Submarine Cable Systems better because :
 More capacity
 Better quality
 Lower prices
AJC Project
 Initiated by Telstra
 High capacity, High volume, Low unit cost project
 Connecting Australia and Japan via Guam
 Used collapsed ring system
1- How would you characterize the project assets?

2- What makes the assets different or unique?

3- Who are the capital providers for the AJC project?

4- Are the capital providers likely to earn appropriate risk adjusted

return on their investment?

Questions to be addressed
1- How would you characterize the project assets?

2- What makes the assets different or unique?

3- Who are the capital providers for the AJC project?

4- Are the capital providers likely to earn appropriate risk adjusted

return on their investment?
Characterization of projects assets
Parameters :
• Life
• Ownership
• Depreciation charges
Assets of AJC
• Single asset company with the Submarine Cable being its core asset
• Repeaters and Transmission equipment formed the other two assets of AJC

About the Cable

• Fiber Optic cable, 12,500 kms long
• Could carry both data and voice signals
• Had a life of 25 years
• Using DWDM technology, the cable could transmit data at 40 Gbit/s
• Suffered as few as one device failure during its lifetime
About the Repeaters
• Used to reshape and boost the signal if the signal was to be transmitted over long distances
• Usually, optical signals could travel only 400 kms before getting attenuated, so use of
repeaters was a must for long distance cables

About the Transmission equipment

• Comprised the transmitter, router and reception Hub
• Determined the capacity of the system to transfer signals
• Could be upgraded at any point to handle additional capacity at a fraction of original cost
Laying of the Cables
 Loop network
• Comprised two cables laid hundreds of kms apart, linked to separate landing
stations, terrestrial lines between the landing stations completed the loop
• Traffic routed in one direction but direction could be reversed of cable was damaged

 Collapsed Ring Network

• Had just one cable running across the sea ,based on the assumption that failures in
deeper waters were far less
• Elimination of second cable helped saved on capital costs
Building Submarine Cable systems
• Choosing the Equipment Suppliers
• Sign supply contracts for cable and repeaters
• Hiring Cable ships to install the cable and repeaters
• Signing “Landing Party agreements” to use preexisting landing stations
1- How would you characterize the project assets?

2- What makes the assets different or unique?

3- Who are the capital providers for the AJC project?

4- Are the capital providers likely to earn appropriate risk adjusted

return on their investment?
Uniqueness of AJC assets
• Collapsed Ring Network helped save capital costs
• Low Cost capacity across the North Pacific
• Access to larger markets because of links to Asia and other cables which
surfaced in Guam
• More efficient to surface and repower the signal
• Could connect with other cables running through Guam
• Could increase capacity from 40 Gbit/s to 320 Gbit/s if the demand
increased
1- How would you characterize the project assets?

2- What makes the assets different or unique?

3- Who are the capital providers for the AJC project?

4- Are the capital providers likely to earn appropriate risk adjusted

return on their investment?
Financing of Submarine Cable Systems
 Clubs
 Comprised of 90 odds sponsors
 Project completion time stretched between 5-7 years

 Private deals with carrier sponsors

 Limited partnership formed to raise debt and equity

 Private deals with non carrier sponsors

 Ownership of cable systems with private investors
Reasons for Private Carrier deal
 Quicker execution
 Danger of technology becoming obsolete
 Rapid decline in prices by 25% or more per year
 Capacity shortfall within the next three years

 Sponsor becomes a stakeholder in the project

Sponsors of AJC
 First feasibility study carried out by Telstra – Australian
telecommunication & information services co. in mid – 1997
 Choice of strategic partners
• Compatibility both at company and personal level
• Decrease project cost (Ex: using existing landing stations etc)
• Should be financially strong investors as well as capacity buyers
• Quicker execution should be possible by avoiding government clearances
 Strategic Partners
• Japan Telecom – landing station in Japan
• Teleglobe – carrier
Other Sponsors
AT & T NTT Comm
Net Income (in US $ mn) 6,398 1,625
Home Country USA Japan
S & P Senior Debt Rating AA- AA+
Landing Stations on AJC Route Guam (2) Japan (3)

Need for high rated sponsor :

• To simplify management of AJC
• Give credibility to project for raising bank debt
• Least financial and operating covenants from banks
• To leverage upon existing assets of the sponsor to further reduce project costs and meet
timelines
Other Capital Providers
 High rated sponsors through presales capacity contracts
 Banks – Syndicated/Bullet loans
1- How would you characterize the project assets?

2- What makes the assets different or unique?

3- Who are the capital providers for the AJC project?

4- Are the capital providers likely to earn appropriate

risk adjusted return on their investment?
Why is Qualitative analysis done ?
 Lack of quantitative data
• Capacity utilization projections for AJC
• Future cash flows
• Demand from Guam
• Intra Asia cable capacity demand
 Difficult to compare with cash flow streams of SCCN as there will be
other cash flow streams as well
Factors for Qualitative Analysis
 Demand
 Supply
 SCCN
 Uniqueness of AJC assets vis-à-vis SCCN
 Views from ABN Amro
 Views of NTT Comm
Expected Demand Growth in
N. America to Asia Traffic (Gigabits)
Australian Demand and Supply for
Capacity (Gigabits)
Existing Supply in Australia
 Australia’s Telecom carriers needed greater access to :
• Asia (Australia’s largest trading partner)

• US (80% of all Internet hosts were located here)

 In 1999, there were 3 cables for Australian Traffic:

• SEA-ME-WE3 (Access to US from West Coast)
• Excess capacity
• Prone to cable failures due to extensive shipping, dredging, and fishing activities
• PacRim East (Access to US from East Coast)
• Full Capacity
• PacRim West (Access to US from East Coast)
• Full Capacity
Southern Cross Cable Network (SCCN)
 29,600 km loop configuration system linking East Coast of Australia, New Zealand and
the US
 USD 1.2 bn cable network
 Initially equipped with 40 Gbit/s of capacity upgradable to 120 Gbit/s
 3 sponsors provided all 10 landing stations
 Debt-to-total-capitalization ratio of 85%
 Confirmed purchase agreements for USD 640 mn
 Merrill Lynch Analyst Reports:
 10-Year DCF model generated base case market value of equity of USD 1.12 bn (discount rate of 13%)
 Book equity just USD 150 mn

Long term value driven by incremental sales of spare capacity which is expected to
snowball as data traffic out of Australia to the US skyrockets
Views of ABN AMRO
 ABN AMRO had led SCCN financing
 Believed that AJC project could support a highly leveraged capital
structure due to sufficient expected cash flows
 Recommended gearing ratio of 85% for AJC
 Raising 2 debt tranches:
 Tranche A -Secured and repaid (probably within 5 yrs) with presale commitments
 Tranche B -Repaid from future sales of capacity to other parties (within 5 yrs)
 Identification and mitigation of major risks
Mitigation of Risks
 Market Risk
 Mitigation: pre-sales capacity contracts from highly rated companies covering approx
2/3rds of total project cost

 Construction Risk
 Not much of a concern due to enough experience of cable suppliers

 Completion Risk
 Mitigation: Incorporate procedures that would allow AJC to draw funds for
construction even if there were delays
Views of VP, NTT’s international network
 No previous cable connecting Japan and Australia
 AJC would offer the lowest cost if the dividend to shareholders was taken
into consideration
 AJC would be an attractive addition to the business in their existing cable
stations
Conclusion
 Facts and Qualitative data suggest AJC as a good bet
 Single Asset Company
• Limited, well defined expansion opportunities
• Execution on the core asset important
• Debt and Equity ownership to be concentrated
• Highly leveraged capital structure to leave minimum free cash flows with managers
• Mitigation of Agency problems
• Management Compensation aligned to execution
THANK YOU !!