Sparkle, International Branch of Telecom Italia, On The Block

Retelit and its minority partner the Italian government just made a $700 million Euro bid for Sparkle's subsea cable business. The bid expires January 27th, 2025. More details here.

My first impression is that this is not a rousing endorsement of the subsea cable service industry. Sparkle does a billion Euros in annual revenue according to a publicly available corporate presentation with wet assets including initially full ownership of the Mediterranean Blue cable and some ownership on Blue-Raman, Equiano, Seabras1, and Curie. However, voice comprises a significant portion of its revenue which most investors will penalize in their valuation estimates. In general, the financial markets view voice as less valuable than data traffic because it is considered a low growth, low margin business. Data is sexy. Voice is not. 

I have always viewed Sparkle as a stodgy company with a 20th century management style with too well dressed senior managers. Rigid old hierarchical corporate structure with limited cooperation between different departments. A company more concerned with following rules and internal bureaucratic procedures per se than actually accomplishing anything. To give perspective on how poor is the proposed valuation, GTT bought the Hibernia Atlantic cable system for slightly over $600 million dollars in 2015. IF you adjust for inflation, the Hibernia sale was a much better deal for its owners. Hibernia's annual revenues were less than a quarter of Sparkle's current turnover. 

However, the bid may be depressed by the fact that the parent company, Telecom Italia, has a lot of debt. Prior to the sale of the fixed line business to the American private equity giant, KKR, its total debt sat at $26 billion. Yet TI's domestic revenues have declined from 20 billion Euros in 2015 to 16.3 billion in financial year 2023. So the submarine cable business looks like it will be a fire sale with the purchase price most likely less than annual revenues. It is a damning fact. But hey, Sparkle's senior managers were the best dressed at the telecom conferences. That must count for something. 😀

Management performance is an issue. It is well known that Sparkle bought fibre on the Seabrass-1 cable. Yet that fibre pair has significantly higher latency than the rest of the cable which suggests the seller spooled it to create an inferior product. Yet Sparkle management still bought it. Not a smart decision for really well dressed, smart looking guys.  The proper approach would have been to specify the round trip latency in the purchase contract and insist on performance parity with the other fibre pairs on the network. Such a purchase would have to be approved at the board level which suggests a remarkably mediocre set of well dressed decision makers. It was a particularly bad decision given the abundance of low latency trading between the US stock exchange data centres in New Jersey (NASDAQ, NYSE) and the Brazilian stock exchange computers at the B2 site in Sao Paulo just a stone's throw from the Equinix Sao Paulo complex.