Tagare: breathing life into Oxygen - Project Oxygen - Industry Trend or Event

CommunicationsWeek International, Nov 15, 1999 by David Molony

Neil Tagare has trod a long road to get his ambitious Project Oxygen going. Announced in June 1997, originally as a subsea and terrestrial fiber network spanning the globe and connecting 175 countries, it was later scaled back to 76 countries. The timetable has slowed; the pricing schemes have been tweaked; and now a 40% stake in the privately financed managed network has been sold to what looks suspiciously like one of the old PTT club members the network was meant to bypass: Israeli operator Bezeq international Ltd., of Tel Aviv.

But Tagare is sticking to his principles. He still thinks Oxygen will be the first and most global "global network" to be built. And he does not see the sale of first-phase equity to Bezeq as a sellout. Rather, it is turnkey finance, a deal that will unlock other sources of funding for the $1.5 billion initial project, just as Oxygen has led contractors such as Bechtel Group Inc. and Lucent Technologies Inc. to project-manage the network build and equipment provision.

Tagare has been in discussions with financial institutions for the past year.

"Investors insisted we find a lead strategic investor who has direct experience in this business," says Tagare. "[Lehman Brothers] and others who want to invest in the equity part of the deal...were saying they would feel a lot more comfortable once we had a strategic investor in place."

In fact, Bezeq is leading a consortium including Elbit Medical Imaging Ltd., of Haifa, and "a number of other Israeli Investors." Their investment does not mean they take 40% of the whole project--only of phase one, building a cable from Israel to New York.

And Tagare says these investors are committed to helping to build the rest of the global network. "You have to differentiate ownership of the company and management of the company," he says. "It is not just Bezeq that has 40% of the equity. They are committed to having a professional managed company at Oxygen level with people that have a thorough understanding of the business. They are also committed to expanding the network."

But he admits that the global commitment was a stumbling block for other interested operators.

"There were operators who would have invested in Oxygen if we [were prepared] to keep a regional focus," says Tagare. "There was an [Asia-Pacific] contender. But since their goal was to stay in the A-P region, and our vision was to build on a global basis, that did not work out."

NTT rumor

Industry analysts think these operators included NTT, which has newly minted international ambitions; particularly as Tagare was spending time in Japan recently.

"We need to raise more equity yet," says Tagare, adding that he is "talking to a number of potential investors."

Those investors may include infrastructure project managers Lucent Technologies, of Murray Hill, New Jersey, and Bechtel, of Frederick, Maryland.

The participation of Israeli partners is itself a watershed in international telecoms. Bezeq came on board just weeks after Telecom Egypt announced it would take capacity on Oxygen. Tagare's first system project, FLAG--Fiber optic Link Mound the Globe, stretching from the United Kingdom to South East Asia--which links many Middle East countries, never landed in Israel. But access to Oxygen has apparently been accepted worldwide. A recent agreement between the Israeli communications ministry and the Palestinian Telecoms Authority to run a fiber between the territories may have helped.

"We have spoken to all the Middle East countries and there has been absolutely no problem," says Tagare.

Frustrating times

But followers of Oxygen have had a frustrating time. There is still extensive financing to be arranged with Lehman Brothers, and Tagare's finance plan still is not finalized, even though he and colleague Pekka Tarjanne, former secretary-general of the International Telecommunication Union, have recently been suggesting they were weeks away from an announcement.

"It could be bank debt or a combination of high yield and bank debt," says Tagare. "There are three or four ways we could pursue it now, and how it's to end up will depend on...how the market is acting, et cetera."

Still some industry analysts say Oxygen is a lost cause, overtaken by the rush of investors, capital and new network builders that are more quickly assembling parts of what will eventually become an interconnected global network anyway.

The doomsayers may be right. Market funding of Oxygen is not guaranteed, with Bezeq's agreement to invest conditional on "closing of the balance of required financing."

Tagare, though, is adamant that Oxygen will succeed.

"It took seven and a half years for FLAG to get financed," he says. "We have been doing this two years and three months. It is not a long time...We definitely will start construction in 2000."

However, Tagare's argument that such projects need landing rights, licenses, pre-sales, supplier agreements, ships for installation and maintenance contracts before they can proceed, apply equally to other subsea systems that have already gone ahead such as Atlantic Crossing and Gemini.