Telstra share price down, to buy Asia’s Pacnet

Telstra Corp Ltd agreed to acquire subsea cable operator Pacnet Ltd as Australias largest telecoms company boosts its operations in Asia.

The acquisition of Singapore and Hong Kong-based Pacnet outlines revitalized interest in Asia from cash-rich Telstra, which disposed of its Hong Kong mobile business last year.

Telstra is one of the few companies which are willing to make big investments into Asia. According to a poll released earlier this month by PwC, only 9% of all Australian firms have operations in Asia and 65% have no plans to enter the foreign market, as it is too different cultural, the survey said.

Under the deal, Telstra will get ownership of the worlds biggest undersea cable network with combined length of 46 000 kilometers (29 000 miles). The network connects China with the rest of Asia and reaches to California through the Pacific Ocean. Pacnet operates a network of 29 interconnected data centers in 17 cities across the Asia-Pacific region.

The acquisition, valued at $697 million, including $400 million of debt, is subject to regulatory approval and is expected to close by mid-2015.

“Asia is an important part of our growth strategy. We believe this acquisition will help us become a leading provider of enterprise services to multinational companies and carriers in the region.” said Telstras CEO David Thodey.

Telstra has been present in the Asian market for over 70 years. However, the region accounted for less than 10% of its 2014 A$23.6 billion revenue. The Australian company said that it will continue to look for growth in Asia after the deal with Pacnet is completed.

Pacnet, which has around 815 employees and 25 offices, generated revenues of $472 million and earnings before interest, tax, depreciation and amortization of $111 million for the year ended December 2013.

“There is a tremendous opportunity for this combination to address the growing demand for services throughout the Asia-Pacific region and provide superior solutions and service to customers,” Pacnets CEO Carl Grivne said.

The combined company is expected to become a leader in the Asian service-provider market and yield operational synergies valued at A$65 million achieved over two years, Telstra said.

Telstra Corporation Ltd gained 1.87% on Monday, but lost 0.67% on Tuesday and closed at A$5.96 in Sydney, marking a one-year increase of 14.62%. The company is valued at A$73.53 billion. According to the Financial Times, the 19 analysts offering 12-month price targets for Telstra have a median target of A$5.65, with a high estimate of A$6.30 and a low estimate of A$4.35. The median estimate represents a 5.82% decrease from the last close price of A$6.00.