End of the road for Telstra/ PCCW JV Reach

Stuart Corner
Thursday, 27 January 2011 08:32

IT Industry - Deals

Ten years almost to the day since they announced its formation, Telstra and Hong Kong telco, PCCW have announced an agreement to restructure the assets in their 50/50 joint venture, Reach, that will see the JV left with only some Hong Kong based assets. The deal has been reported as netting Telstra a gain of $150m but Telstra has loaned Reach $182m interest free which it has no expectation of recovering.

Telstra said: "The restructure will give Telstra International Group greater control over the platform used to deliver end-to-end services, improving the quality of service offered to enterprise and global service provider customers. The structural changes to Reach are expected to be completed during the first half of 2011 by the management of Telstra International Group, PCCW and Reach.

As a result of this restructure, Telstra anticipates recognising an accounting gain of $50m on signing and a further $80m to $100m on completion.  The value of Telstra's 50 percent share had been written down to nil several years earlier and at 30 June 2010 Telstra had carried forwarded losses of $596m for Reach.

During the 2010 financial year Telstra paid $270 million for capacity and connectivity and received $59 million from Reach for international inbound call termination services, construction and consultancy. In addition it provided $182m in interest free loans to Reach. In its full year accounts Telstra said: "We have provided for the non-recoverability of the loan as we do not consider that Reach is in a position to be able to repay the loan amount in the medium term."

Reach was announced in February 2001 as an international 'carriers' carrier' into which Telstra and PCCW tipped their international submarine cable asset. Great hopes were held for the joint venture but by 2004 it was in serious strife and was rescued by Telstra and PCCW buying the company's $U1.2b of bank debt for a mere $US311m. Telstra also wrote off $US143m in capacity prepayments to Reach and Telstra and PCCW each provided the company with a $US50m revolving credit facility.

Then in 2005 Reach's international cable capacity was allocated between Telstra and PCCW under an indefeasible right of use (IRU)  agreement, including committed capital expenditure for the period until 2022.