John Linton
I read a couple of speculation pieces in the Australian financial press over the last two days as to whether the required 75% of Pipe shareholders would approve the $A6.30 per share offer made by TPG to buy the company - the views were similar - probably but not as certain as it once was. I have no idea other than the shares have fallen back in price over the past day or so (I didn't really look before Monday of this week) and it would seem that you could make a quick profit if you thought the offer would go ahead. I really have only one interest in Pipe - which of course is how TPG ownership would affect Exetel in terms of the various circuits we buy from Pipe (our business is less than $A50k a month and we are in the process of replacing $A30k of that with an alternate supplier at a saving of around 40%). It did make me wonder what the Pipe business is actually worth if other customers are being as overcharged as Exetel have been over the past two years and how many of them will either ask for big price reductions or, like Exetel, be concerned enough take their business elsewhere anyway.
Steve has been dealing with various IP suppliers as part of our contract review process and is finding some surprising 'bids' that also make me wonder just what Pipe's revenues are likely to be in the future if the information he is seeing is going to continue a trend. A year ago we were paying around $A180.00 for 'pure' IP traffic. By July of last year that had fallen to $A125 per mbps and by November it had dropped to $A90 per mbps. By January pricing had fallen to $A70.00 and the quotes that Steve is now negotiating are around $A60.00 per mbps - a fall of 66% in less than 12 months. Now clearly if these sort of prices are being offered to Exetel then you would have to assume that companies with larger IP usage would be getting better offers - unless they are foolishly tied in to long term contracts for some reason or another.
Exetel currently 'deploys' almost 6 gbps of IP - 4.5 gbps of 'pure' IP with another 1.5 gbps from our Akamai, PeerApp and peering resources.....a fair bit for a company of our size but much less, one would assume, than the larger communications providers. However it is reaching/has reached a size where we can consider buying directly from either Southern Cross or one of the newer entrants into the Australian marketplace. The 'difficulty' of buying direct is the up front costs that, depending on the source of the IP, varies between $A3 million and $A5 million. They are hefty sums of money but deliver bandwidth at prices below $A50.00 per mbps in the first 2 - 3 years falling to less than $A10.00 per mbps in years 4 - 15 - at least that's what it appears to be without going through the contract in detail.
At $A10.00 per mbps the cost per gigabyte delivered to the customer (for the IP portion) is around 5 cents a gigabyte compared to around 35 cents today....a huge difference for end customers who download large amounts of data. While there is a big up front (big for a company of Exetel's size) payment required it would mean that we could reduce our 'pure' IP cost by 75% from what we were paying in March last year and still pay much less after paying back the money we would have to borrow plus the interest. (around $A40,000 per gbps per month)
I guess that's what TPG found attractive about the Pipe deal.
But, and there's always a 'but'. If IP prices continue to fall as they have over the past year, and I think I am beginning to get a glimmer of an understanding of why that might be the case, today's deal is not as good as it sounds - even ignoring the risks of borrowing $A4 million in a very difficult marketplace. It seems likely that the cost of buying IP will be lower next year than the $A45.00 that the 'purchase your own IP' deal (ignoring the cost of paying back the money and interest) has locked you into for three years. The SX deal, while up front more expensive provides much lower pricing 'today' than $A45.00 per mbps (perhaps half of that if you extend the loan term beyond three years) but never quite gets you to sub $A10.00 per mbps. The trouble always is - trying to work out what price IP will be each six months as time passes - and, of course, what amount you will need in 3+ years time - maybe not as much as you need today.
Then again.....IP and intra-capital city prices might not fall further and all sorts of other things may change in this very difficult year. Perhaps the Pipe owners and shareholders who have already sold their shares made a very good decision.
PS: Another straw in the wind indicating no market for an 'NBNN2' that could never be sold at the price it would cost:
http://www.misaustralia.com/viewer.aspx?EDP://1268174866621