The worldwide financial crisis made its mark on the regional telecom sector last week when two of the largest outstanding M&A deals bit the dust.

The first to go was Huawei’s bid to sell its mobile handset unit, followed by PCCW’s effort to shift a sizable minority stake in its legacy telecom business. Both transactions had attracted the interest of a range of private equity suitors—both fell victim as the putative buyers took fright.

It’s tempting to read too much into the significance of this for other large planned telecom investments—national broadband network projects in Singapore, Malaysia and Australia come to mind—but it’s worth remembering that Huawei and PCCW were offering low margin, commodity businesses with little prospect for high future growth. Huawei is a low-end player in handsets, PCCW an incumbent in arguably the most competitive telecom market in the world.

NBN projects—facilitated as they are, by mandate, as effective monopolies—should be more attractive. Telecom investments are not dead, only the less attractive, slower ones, suggests logic.

But maybe not so.

Despite the fighting words from both Telstra and Terria last week suggesting that their NBN bids would not be crisis-affected, their financing task just got much harder—for two reasons.

UNPROVEN DEMAND: Firstly, while the NBNs might be perceived as monopolies, they are far from proven businesses with cashflow in the sense of a Huawei. NBNs are political projects largely derived from political ambitions—based on neat round numbers. Fibre to the home for 95% of Singaporeans in 4 years, 12Mbps minimum for 98% of Australians in the same time frame.

Australia’s NBN policy might be loosely based on a proposal created by a real live telco—but it differs in important details. Telstra originally sought US$4.7 billion as a grant, but it will now be provided in the form of a loan or equity and with more conditions attached—such as open or equivalent access– than originally intended when the numbers were first calculated. A financier will not look at the parameters of the NBN RFP and its concomitant bids and see something based on proven demand or cash flows. They will see something largely conceived as a political solution to break an investment impasse, that, all too conspicuously, was created by regulatory disincentives in the first place. Hardly the kind of thing that will get an easy ten billion dollar line of credit.

LOW DOLLAR: The second issue for the NBN is a related crisis that has been mysteriously swept under the carpet by the Aussie financial press—that of the collapsing dollar. The dollar reached near parity with the US dollar a couple of months ago and has since collapsed to just 63c at its lowest ebb. A 35% swing in the unit of currency in a matter of months is hardly the type of phenomenon that will endear a country to foreign lenders, especially when we are talking about a project that will be highly dependent on foreign imported technology—mainly from US dollar, Euro or Chinese yuan zones (the yuan is indirectly linked to the US dollar).

Given the sheer expanse of the proposed NBN—we’re talking tens of thousands of imported nodes and so on—its business case is likely to be extremely sensitive to shifts in exchange rates. Exchange rate shifts of the scale we have seen recently could play absolute havoc with return on investment and profit/loss projections. An ideal NBN contract process will probably mandate tight rollout deadlines, so it is hardly likely that a successful winner could turn around and say, let’s delay delivery of nodes until we get a better exchange rate! The government will need to be extremely empathetic to bids that are likely to be loaded with caveats based on varying future financial scenarios.

No doubt there will be some who simply say the Aussie dollar has over-corrected and will come back soon. Maybe so and one hopes so! But I didn’t see too many pundits accurately predicting its collapse a few short weeks ago.

A government can guarantee bank deposits. It can’t guarantee demand for broadband. Or the future costs of supplying it.

Grahame Lynch