Hutchison and ST Telemedia return to claim Global Crossing: Hutchison's and ST Telemedia's successful second bid for Global Crossing last month was a masterpiece of ironic suspense. Now, dealmakers still have a maze of restructure details, regulatory requirements and not a little political thunder over Red Communists and "national security nightmares" to navigate before the deal's official - News Analysis

Telecom Asia, Sept, 2002 by John C. Tanner

When Global Crossing rejected a $750 million joint bid from Hong Kong's Hutchison Whampoa and Singapore Technologies Telemedia earlier this year, saying the offer was insultingly low for its $22.4 billion network, Hutchison and ST Telemedia stormed off, vowing never to return. Five bid deadline extensions later, they did--and took 61.5% of the business for $250 million (a third of the original offer), with Global Crossing's majority stake in Asia Global Crossing included in the bargain.

The deal bodes well for just about everyone involved, under the circumstances. Hutchison and ST Telemedia of course bought a lot of synergy potential (both own full-service telcos in their home markets as well as international telecoms businesses) for a bargain-basement price. And while the deal may qualify for "Miscalculation Of The 21st Century" from Global Crossing's standpoint, landing a better offer at a time when the financial and legal problems of companies like Qwest, KPNQwest, Tyco, and, WorldCom were shortening the list of potential bidders every month was a lot to ask of anyone.

In fact, says Christopher Slaughter, director of Asia-Pacific communications research for Yankee Group, Global Crossing should at least get credit for keeping its business worth buying.

"They've worked hard to maintain the value of their business during an appallingly difficult time in the industry," Slaughter said. "The good news for them is that the company will stay in business going forward, free to refine its strategy to compete effectively."

That said, it may also be too early to call the Hutchison-ST Telemedia bid a done deal. It's a long road from here to 2003, and several issues remain to be addressed in the meantime, starting with the details of the final reorganization plan for court approval.

Debt-heavy subsidiaries

One such detail is AGC subsidiary Pacific Crossing Ltd (PCL), which operates the PC-1 transpacific subsea fiber network. PCL filed its own Chapter 11 papers in July, owing its bank creditors around $700 million. Then there's AGC itself, which is shielded from PCL's bankruptcy via a non-recourse financing arrangement, but has $400 million in debt of its own.

"The key questions are firstly, whether AGC will receive any cash from the Hutchison-STT deal, and secondly, would any of this be used to support its position in PC-1," says Yankee Group's Australia and New Zealand MD Rob Padgett. "With plenty of suppliers and the price of transpacific bandwidth falling, I suspect that AGC would choose to let PC-1 go and direct any cash it has to building its regional corporate services play, using leased transpacific capacity as required."

Of less concern are the ongoing investigations of Global Crossing's accounting practices by the US Justice Department, the SEC, and Congress, as well as some 60 shareholder lawsuits, says Slaughter. "The ongoing investigations certainly would have played a part in the valuation of the deal, and must be seen to be part of the risk profile going forward."

"Red China" blues

The Hutchison-ST Telemedia deal will also need to clear regulatory muster with various agencies. In the US alone, the deal has to be cleared by the FCC, the Justice Department, the State Department, and dozens of state-level regulators. Business as usual, but potentially complicating things could be the inevitable political flak from hardline conservative Republican politicians who for years have accused Hutchison of being a threat to American national security via its ties with "Red China".

For example, when Hutchison and ST Telemedia made their first bid for Global Crossing, Republican Congressman Dana Rohrabacher sent a letter to Defense Secretary Donald Rumsfeld in March asking him to investigate the deal on the grounds that Hutchison chairman and tycoon Li Ka-shing had "extensive ties to the Chinese Communist leadership", especially with the Chinese military. With Global Crossing counting the US military and other government agencies as customers, Rohrabacher claimed, a Hutchison-led takeover of Global Crossing "would be a national security nightmare".

So far there's been little anti-China bombast from Republicans this time round, if for no other reason that Congress had already adjourned for the summer until 4 September. But ultra-conservative pundits are already sounding the alarms, and with mid-term elections in November, Hutchison and possibly ST Telemedia, which is technically owned by the Singapore government, will likely make for nice campaign mill grist.

Ultimately, though, Slaughter says that this is unlikely to kill the deal. "That sort of xenophobic nonsense has been brought up before and dismissed before, and if it does emerge again, it will invariably be dismissed again," he says, "especially when it's pointed out that the bankruptcy courts have worked exactly as they're supposed to, by providing an otherwise insolvent company with the means to continue to employ people--make that `voters'--and to generate economic activity."