John Linton
I read the confirmation that TPG (I know that isn't the official name any more but I will take time to start using SPT) had made a full bid for Pipe yesterday and doubtless the details and 'analysis' will appear in the various media today and then continue until the deal is finalised closer to Christmas. I exchanged views on "what it all means" with the few people I correspond with on the state of the data communications industry in Australia but they had nothing pertinent to say as they had no views (other than the conventional ones that immediately spring to mind) on the topic as there is no information beyond the confirmation of the bid and the fact that it will depend (not that there is much dependence in this particular situation unless someone else decides to make a better offer of course) on due diligence and funding confirmation. So TPG, shortly, becomes 40% or so bigger in terms of market capitalisation and has a range of new issues to deal with - including a lot of debt. what to do in terms of wholesaling and what would be the best way of operating the different pieces of the Pipe business it may or may not choose to keep.
None of this affects Exetel in any way other than deciding what we will do about the few links we buy from Pipe (around $A40,000 a month from memory) which, for safety reasons, I guess we will move to a neutral carrier at the appropriate time. Perhaps other companies like Exetel will do the same but I have no idea. As there has been a 'material change of ownership' of Pipe I would think that the overwhelming majority of the contracts that Pipe have would now be void and that some unknown percentage of current Pipe retail and wholesale customers will take that opportunity to re-assess their circumstances. You would think that some companies would see this particular ownership change as being not in their best interests though that will eventually depend on the costs of moving the services to a new provider in most cases. Perhaps TPG will simply acquire the company and then sell off the wholesale part of the business (to Vocus?) or to some other entity and simply keep the infrastructure?
Either way it seems very unlikely that TPG would care very much about the revenues currently being derived from wholesale customers nor would have taken future wholesale revenue in to any decision to acquire the Pipe infrastructure which, as I previously guessed at, was to do with controlling more of the network (and therefore the costs) that is needed to deliver their own services to large end users in the major cities and to boost the old Comindico national backbone around the country generally.....whether that may well pose some difficulties of aggregation and amalgamation....only TPG would know whatever that may be. I would think that the debt on the overseas cable would be of such a magnitude that it wouldn't provide TPG with lower cost international IP transit than they already get from their own SX link but I wouldn't really know. Taking on so much additional debt (both the money they will need to borrow to buy Pipe plus the large debt contained within Pipe) appears to be a very atypical and bold move.
The major 'strange' thing about the deal is that TPG would elect to pay a premium price to acquire Pipe given their track record (most evident in the 'sale' of TPG to SPT last year) of only paying a bargain basement price for any acquisition (at first sight the PE ratios look very, very high for such a transaction). Maybe that's what they've done in this instance as well - it just isn't evident from the little that is known at the moment. However paying a premium to acquire quite a lot of debt plus having to pay interest on the money used to buy the assets seems out of line with how David Teoh grew TPG over the past 20 years - time will tell as it always does.
I don't know what this 'deal' means in any general sense to anyone other than TPG's shareholders (and, of course, Pipes shareholders who become richer than they were before the offer was made and Australia's luxury goods sellers will get a boost once the money actually changes hands). If I had to guess I would say that UEcomm, AAPT and Optus would pick up the majority of Pipe's wholesale business over the coming twelve or so months but that isn't really of a size to make much difference to any of those companies revenues or profits on wholesale services. I would hazard a guess that TPG will become more involved in the medium/medium large business marketplaces around the capital cities and that may well be because they see an end to any real growth in their ADSL marketplaces and need new revenue streams in a hurry. So no real changes around the industry.
It will be interesting to see what the larger ISPs who committed to buying international IP from Pipe now do.