The juiciest opportunities from Vocus' $861m Nextgen buy

Vocus' $861 million Nextgen buyout will give it immediate NBN backhaul muscle, access to Australia's top LNG projects, and the chance to reinvigorate its Perth-Singapore cable play.

The ASX-listed company this week made a major bid for Nextgen Networks' terrestrial dark fibre and subsea cable projects.

In an interview with iTnews, Vocus CEO Geoff Horth revealed how the company plans to revive the fortunes of the Australia-Singapore Cable (ASC) project.

In addition, Horth outlined how the Nextgen buy will open doors for Vocus in Australia's gas-rich north-west, and - for a small additional capital investment - make Vocus a major new player in the NBN points of interconnect (PoI) backhaul space.

Australian-Singapore cable

Vocus will now resume selling prospective customers on the Australia-Singapore Cable after several months spent “hamstrung” by negotiations to buy out its joint venture partner on the project.

The buyout, if successful, will give Vocus full control of the 4600km Australia-Singapore Cable (ASC) project that it revived late last year as a 50-50 joint venture with Nextgen.

Horth told iTnews the project remains contingent on securing customer commitments to buy capacity on the cable, which will run from Perth to Singapore.

“We won’t do that project without the appropriate customer backing,” Horth said.

“We’ve been a little bit hamstrung because it was a joint venture with Nextgen, and over the last couple of months it’s been a little bit hard for us to go and talk to prospective customers because we’ve been in negotiations with Nextgen’s owners to buy the business.

“We’ll now press on with that.”

ASC is one of three projects vying to lay a Perth-to-Singapore subsea cable that would compete with the existing SEA-ME-WE3 link on the route.

Competing projects include SubPartners’ APX-West – which recently switched to a consortium model with Telstra and Optus to try to get an edge – and Trident Subsea Cable, which is trying to secure a final round of finance.

Horth said ASC is “technically advanced”, having completed marine surveys, secured landing permits and with “most requirements in place” barring enough commitments to see the build progress.

“Obviously there’s a number of competing projects,” he said.

“My view is there’s a good [potential] return but there’s only enough demand for one [to succeed].

“We wouldn’t build unless we can secure some customer commitments.”

Vocus has said the estimated cost of ASC is around US$130 million (A$174 million).

The company isn’t paying anything upfront to take full ownership of ASC, but is required to pay US$20 million (A$27 million) to Nextgen if construction commences or if it decides to exit the project – for example, to participate in a rival project on the route.

Tapping the north-west

Vocus’ buyout of Nextgen also includes the handover of the North West Cable System (NWCS) project – a subsea route between Port Hedland and Darwin designed to service mostly liquefied natural gas (LNG) rigs tapping the north-west shelf.

The base business case for NWCS was to provide the connectivity being demanded by LNG and resources operators to power automated systems at their sites.

NWCS is expected to come online in October. The cable has been laid and – as of February this year – brought to shore at both ends.

The time between now and October will be spent on end-to-end testing of the cable system and making the final connections between customers’ rigs and nearby branching units on the cable.

The foundation customers are Inpex for its Ichthys project and Shell for its Prelude project.

“By the time we take ownership of the asset it’ll be operational for the two cornerstone customers,” Horth said. “It gets handed over to us ready for service."

Vocus is proposing to make a US$80 million (A$107 million) upfront payment to Nextgen for NWCS, with a further US$20 million (A$27 million) “conditional on certain customer commitments being reached”.

In financial filings, Vocus indicated it would take ownership of the asset for well below what it cost to build. Horth said he was unable to reveal by what margin.

There appears to be a lot of potential upside in NWCS for Vocus.

“It has a significant number of branching units,” Horth said, without being drawn on exactly how many.

“They’ve created branching units for all the likely possible new customer opportunities including other rigs and potentially into other areas [of the north-west].

“It’s definitely future-proofed.”

When NWCS comes online, Darwin will act as the main point for traffic on the subsea cable to interconnect with terrestrial networks.

Though the cable also lands in Port Hedland, Nextgen had only proposed a project to then run a terrestrial fibre link from there down to Geraldton, where it could interconnect with existing fibre into Perth or other capitals.

Horth said Vocus will “explore” a terrestrial link from Port Hedland to Geraldton to complete the north-west fibre loop, but said it would “come down to us getting appropriate customer commitments”.

“We are dealing with some of the resource companies up in the Pilbara to see whether there’s an appetite for that project,” he said.

“If we can get the customer funding we’ll build it and it would complete the loop.”

Becoming a bigger PoI player

The Nextgen deal also provides Vocus a way to inexpensively connect to NBN’s network of regional points of interconnect (PoIs).

Vocus’ current on-net coverage is 68 NBN PoIs, courtesy of its metro fibre assets.

“Vocus has a pretty significant metropolitan fibre footprint in all the mainland capital cities, which gets you to most of the metro PoIs,” Horth said.

This contrasts with Nextgen, whose network connects mostly regional centres and therefore passes closeby NBN’s regional PoIs.

Vocus said in financial filings that for an estimated $11.5 million, it would be able to deploy fibre runs from the Nextgen network to these regional PoIs, boosting its on-net PoI connectivity to 112 of a total 121.

“The great surprise in this [deal] is that with a reasonably modest level of capital [we can] run fibre to connect into 112 PoIs,” Horth said.

“It’s a pretty significant strategic outcome for the business.”

Vocus said connecting to the remaining nine PoIs would be economically unviable.

In any event, Vocus has some off-net connectivity to all 121 PoIs using Telstra capacity under a deal brokered by M2 to power its NBN Connect product. Vocus and M2 merged earlier this year.

“We’ll still be utilising that capacity [from Telstra],” Horth said.

“The fibre for the 112 PoIs [that Vocus will connect to directly] will be used to cater for expected growth in capacity and to service our wholesale and our corporate business.

“For a fixed price, [we’ll have] almost unlimited capacity with those 112 PoIs and that’s complementary to the deal we did with Telstra.

“It just gives us our own fibre for the excess capacity beyond the capacity we’re committed to with Telstra.”