STT is rapidly emerging as one of the most interesting telecoms stories in Asia. With Global Crossing and Indosat stakes already purchased, it has just merged some of its assets with those of Equinix and Pihana and emerged as the largest shareholder in the world's largest network neutral internet exchange services company. Matt Burlage, head of boutique investment bank IRG, was one of the advisers on the deal and explains its intricacies.
What is the history of this deal?
Burlage: Equinix, Pihana and STT are in the data center and infrastructure services business. We took the view about a year and a half ago that critical mass and scale through consolidation, globalization or regionalization were the key to success or survival in this sector. With that view, we approached Pihana senior management and recommended a broad range of strategic and financing alternatives including both global and local strategic partnerships as well as synergistic mergers and acquisitions opportunities. We identified Equinix as one entity that had significant operational synergies with Pihana. Our view was that a combined entity had the potential to secure a leadership position in the global marketplace.
Like most of the US telecom services and infrastructure providers able to access the debt capital markets in 1999/2000, Equinix borrowed substantial debt, over $300 million, to build its platform in the US. We recommended that successful debt restructuring and additional capital were needed. We subsequently identified and introduced STT as a key strategic partner, which would contribute additional business synergies with Equinix's data centre business in Singapore and Thailand as well as financial support to the combined entity. STT recapitalised the business, putting in $30 million of new capital - which Equinix used to buy back high yield debt and restructure bank debt.
Equinix remains a US listed company, but STT will control over 45%, assuming full conversion of its convertible secured notes. Even before the conversion, it's the largest strategic shareholder.
Where are the assets located?
Equinix built out in seven US cities. Pihana built out in Asia and the US - in Sydney, Hong Kong, Tokyo, Singapore, Hawaii and LA. And STT has Singapore and Bangkok.
So will STT control Equinix?
STT has two board seats out of nine and Lee Theng Kiat, President and CEO, is chairman.
What are internet infrastructure companies?
Internet infrastructure companies provide their clients with access to systems infrastructure and management that supports infrastructure-related functions or processes. This covers mostly non-core business functions such as back office and IT related that it make more sense to outsource from a cost perspective.
Internet data centres provide the physical infrastructure for housing the Web and application servers, network connectivity, Internet, hardware and software management (servers, operating systems, and Web site applications), network management and also performance-related services (security, storage, load balancing, content delivery, and site and network monitoring)
Equinix/Pihana/i-STT all has built highly secured state-of-the art facilities. Equinix has a diversified client base: telecoms companies that want to land in a country and use the data centre as their central hubbing point; content companies; financial institutions which put their back up data storage, or back-up trading floors; and also big systems integrators such as EDS and IBM - which do a lot of outsourcing for banks such as Bank of America and ABN AMRO.
What is the growth potential?
The US is a mature market and Equinix data centres in the US are break even. The growth is likely to come out of the Asia business units.
Now that it has been restructured, does this business start to give utility-like returns?
In 1999 and 2000, investors allowed you to build businesses that were supposed to break even in 2004-2005.
What this merger has done is to attack the cost structure very aggressively. This company will turn cashflow positive even on a consolidated basis very quickly. It's a fixed cost game. They've absorbed all the assets at very good prices; so amortization isn't that huge. More importantly you have a certain amount of fixed costs and when you add incremental customers, over 50% of that new dollar drops straight to the bottom line.
My recommendation is to further consolidate in Asia. You don't need the physical space, just the customers - because all dollars from that customer fall to the bottom line.
But if you wanted to grow in China, would you have to build data centres in China?
The idea is to scale and integrate the Asian and US businesses within six months. Then from a growth perspective you look at China. But the market in China is at an early stage so there is no rush.
How does this all fit together with STT's overall telecom strategy?
Global Crossing represents a global connectivity platform. It is undersea cable, and landing rights. This is what the traffic flows through. Underneath that there is Equinix, which is internet infrastructure services. This is hosting, security, network management. It's all the value-added services on top of a connectivity platform. And then they also want to invest in high growth regional cellular companies. It has Starhub in Singapore and so STT has relevant cellular expertise. It has already invested in Indonesia and the other places they are looking are India, Thailand, and the Philippines.
Twelve months ago STT only had Starhub and Singapore Cable Vision which they were trying to merge; but they have been able to create a much bigger platform in a short time.
If you look at who is consolidating and who is investing in the Asian telecoms markets, it is Asian strategic interests. The people who are keen on Asian regional strategies are companies like STT. Pretty quickly, they have become one of the key strategic investors in Asia. And with Global Crossing and the Equinix deal, they are part of a fairly select group of strategic investors that are taking advantage of some fairly depressed asset valuations.
What was IRG's role?
We advised Pihana Pacific. We and the management of Pihana came up with the idea of merging with Equinix. Then when that deal needed extra capital we went down to Singapore and spoke to STT. We also created the investment structure for the new capital.
ST was advised by Steve Miller, who used to be at CSFB. He was retained as a consultant. Equinix used Salomon Smith Barney.
Is this the first deal IRG has closed?
No, it is not the first deal that we closed. But it's the largest transaction that we have closed. It took more than six months to structure this transaction given the complexity of the transaction: a 3-way merger with new capital investment and also recapitalization of the bond and the bank loan. We have done a number of equity financings, restructuring, strategic sale and acquisition, debt renegotiations and Asia Pacific market entry. But from a marquis transaction point of view, this has been pretty important to us. I have spent a lot of my time on this.
I feel very pleased because this has created a genuinely stronger company both financially and strategically. STT has put in $30 million of strategic investment, it unlocked more than $26 million of cash from Pihana's balance sheet and Equinix was able to retire $116 million of senior notes. This transaction demonstrates our ability to originate and complete complex transactions under challenging market conditions.
By my count, this would put us close to the top of the League Tables for Telecoms M&A in Asia. Having said that, I wouldn't mind slipping a few notches because the markets started to heat up again.