Retelit is a competitive
Italian carrier with a pan-European network. Retelit together with the
Italian Ministry of Economy and Finance have purchased Sparkle with a
30/70 ownership split. Why the current Italian government keeps
insisting on public ownership of telecommunications infrastructure is
beyond me. There are no real benefits. Italian government interference
in important sectors like banking and now telecom have brought only
problems, no solutions. Government ownership often leads to management sacrificing long term financial health to goals such as preserving head count.
This purchase
together with the recent EXA acquisition of Aquacomm for only $45
million despite a couple hundred million dollars in network investments
raises alarm bells about the financial health of the subsea cable
industry. Sparkle generated a billion Euros in fiscal 2023 or 1.14
billion dollars at the current exchange rate. Yet it was purchased for
far less than current revenues, a sign of financial distress or a heavy
debt load or most likely, both. This discount was based on the company's
net debt holdings (debt - cash). According to the press release,
Sparkle has roughly 600,000 kilometers of fibre and a thousand POPs. Now
Sparkle and Aquacom have quite different business models. Acquacom was a
pure layer 1 capacity supplier with ownership in several Atlantic and
Irish Sea cables. I always felt that Aquacom's management didn't get it.
Their first project was linking Ireland to the US when there was
already lots of capacity on the Hibernia cables. Then Hibernia Express
was built, which was lower latency than AEC1. This allowed Hibernia to
capture at very high prices the cream of the global financial traders.
It largely wrecked Aquacomm's position in the market.
In
contrast, Sparkle has a wholesale voice business in addition to Layer
1-3 services with a large Internet backbone rated sixth globally for ASN
connectivity. Yet despite this, it ended up a
distressed asset sold in a fire sale. When I have more time, I will try
to provide a more insightful financial postmortem. What I know is that
Sparkle did have management problems. It is well known in the industry
that Sparkle's board purchased fibre pairs on Seabras1 despite the
latency being higher than the other pairs. The original Seabras-1
management sold fibre pairs that were spooled to increase end-to-end
latency. One can argue that Sparkle got a discount, but in general it is
a bad idea to buy a handicapped fibre asset because it means the owner
will always have a significant advantage in any competition involving
the spooled versus unspooled fibre pairs. It was a dumb move which
illustrates the low quality of industry management. My general
impression was Sparkle was never a real wholesale player. For example,
the 100G pricing on the MedNautilus cable into Istanbul was as much as
3X landline alternatives into Turkey via the Balkans. Sparkle relied heavily on its legacy wholesale voice operations and reciprocal business with other incumbents.
Clearly the wholesale industry needs some consolidation because operating margins are poor. However, the legacy of stodgy incumbent management mindset also weighs heavily on the industry.
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