Industry Implications Of Retelit's Sparkle Purchase For $700 Million

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.