October 13, 2005 4:34 pm

KDDI acquires PoweredCom to take on NTT

KDDI, Japan’s second-largest telecoms operator, is acquiring PoweredCom, the fourth- largest operator, in a share swap deal worth Y127bn ($1.1bn) aimed at taking on industry leader NTT.

The deal, which comes as Japan’s fixed-line sector faces growing competition from mobile and IP telephony, takes the consolidation of Japan’s telecoms industry a step further.

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KDDI is also linking with Tokyo Electric Power (Tepco), PoweredCom’s parent, in fibre-optic services. The two groups will combine their fibre-optic services within the year to provide high-quality content delivery service and better compete with NTT.

“By tying up with Tepco we can launch more and more services the NTT group does not offer,” said Tadashi Onodera, KDDI president.

The deal gives a boost to KDDI’s high-speed fibre-to-the-home data business, which has relied on leasing dark fibre from arch-rival NTT and its strategy to offer fixed-line and mobile phone convergence.

Tepco and PoweredCom have a combined 160,000 kms of optical fibre and an alliance with the optical fibre businesses of other regional electrical power companies.

Mr Onodera said the deal would free KDDI from its reliance on the NTT group for optical fibre and allow it to reduce costs and bring services to market more quickly.

“By co-operating with Tepco we hope to set up a system whereby we can use its network at a lower cost than (leasing) NTT’s dark fibre,” he said.

Tepco will consider whether to spin off its FTTH business in the future as a step in merging its service with that of KDDI.

The deal also aims to achieve a convergence of telecoms and energy services, the groups said. Details, however, have yet to be hammered out.

Analysts said the high price KDDI was paying for PoweredCom, as well as future integration costs, could undermine the benefits in the short term.

“The key going forward is how this very expensive purchase will contribute to increasing KDDI’s enterprise value,” wrote Hitoshi Hayakawa, telecoms analyst at CSFB, in a note. “We calculate the costs of integrating the two companies’ operations will inevitably be negative for operating profit and net profit in the near term.”

KDDI will issue new shares to Tepco, which will transfer its 83.8 per cent stake in PoweredCom at a ratio of one KDDI share for each 0.032 PoweredCom share. This would give Tepco a 4.8 per cent stake in KDDI.

Another concern is the profitability of FTTH.

PoweredCom has a long history of red ink, points out Kazuyo Katsuma, telecoms analyst at JPMorgan in Tokyo.

“It is clear that (KDDI) has to have fibre, but how are they going to make money?” The problem with FTTH is that the capital expenditure is too high for the returns, she notes.

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