Telstra and PCCW's Underwater Woes

Telstra and PCCW's joint venture, Reach, has been plagued by financial struggles, including annual interest bills of around $70 million and a decline in network prices. The debt restructuring has alleviated some of the burden, but the future of further financial handouts remains uncertain. Reach's financial woes are compounded by the fact that its investment does not translate into profit, with capital expenditure closing in on expected earnings. Telstra and PCCW's differing financial situations will dictate their capacity to provide future support to Reach.

Key Takeaways:

• Reach, the joint venture between Telstra and PCCW, has been saddled with annual interest bills of around $70 million due to overcapacity and falling network prices.
• Telstra and PCCW have provided financial support to cover part of Reach's debts, with the creditors taking a significant haircut.
• Reach is earning not much more than it is spending, with indicated capital expenditure of about $60-70 million closing in on expected earnings before interest, tax, depreciation, and amortisation of under $84 million.
• Telstra has the capacity to continue providing financial support to Reach if needed, but PCCW's financial situation is more precarious, with the latest Reach payments equating to roughly a third of its estimated free cashflow this year.
• Investors who accord PCCW a premium to its peers in the region should reassess their opinion given PCCW's significant financial commitments to Reach.
• PCCW's Hong Kong operator status and reliance on cashflow to service debts exacerbate the financial strain on the company.

Statistics:

• Annual interest bills for Reach: $70 million
• Capital expenditure for Reach: $60-70 million
• Expected earnings before interest, tax, depreciation, and amortisation for Reach: under $84 million
• Percentage of PCCW's expected free cashflow allocated to Reach: 33%

Sources:

• "Telstra and PCCW's Underwater Woes"