After years of languishing in the doldrums and making losses, the two-year-old management team, headed by CEO Afzal Abdul Rahim, has managed to bring Time dotcom Bhd (TdC) into the black. The announcement of a proposed deal to Bursa Malaysia last week took the transformation one step further. It could turn TdC from a local player into a regional player by next year.

TdC has proposed a RM339 million acquisition of the Global Transit Group’s entities, which mainly deal with the wholesaling of Internet protocol (IP) bandwidth through a stake in an international submarine cable.

It will also venture into the data centre business through the acquisition of local data centre player, the AIMS group. All these acquisitions will be paid through the issuance of RM248.1 million worth of TdC shares and a cash payment of RM90.9 million.

The company is strengthening its balance sheet by undertaking a 90% capital reduction exercise to pare down accumulated losses of up to RM3.04 billion from past years. This will be followed by a 5:1 consolidation of TdC shares and a capital repayment to shareholders amounting to RM50.61 million.

If the proposed deal goes through within the six-month deadline, TdC can count itself a competitor in the Internet bandwidth game to giants such as Japan’s KDDI and India’s Bharti Airtel.

The acquisition of Global Transit entities comprises 100% of Global Transit Communications (GTC) for RM106 million, 100% of Global Transit Labuan (GTL) for RM105 million, 100% of Global Transit Singapore (GTS) and Global Transit Hong Kong (GTHK) for RM1 each.

The mainstay of these entities comes from GTL’s 10% stake in the US$300 million Unity cable. The 9,620km underwater cable runs from the US to Japan with a design capacity of 4.8 Tbps of data. With a 10% stake, TdC potentially has access to 480 Gbps of bandwidth to sell to regional telco players and local telcos.

Started in February 2008, the cable was completed in April and provides an alternative route for Internet traffic in this region to the West, where most websites are hosted.

These companies are presently held mainly under Megawisra Sdn Bhd, a company partly owned by Afzal. Megawisra owns a 100% stake in AIMS Group, GTC and a 35% in GTL. With a large acquisition price tag for TdC, market talk has it that the related party transactions might look like a bailout of Afzal’s own investments.

Afzal tells The Edge that the move is a “bold but rational and well thought out” one.

“Megawisra and Khazanah have stayed out of the voting on this. At the end of the day, it is the minority shareholders who will decide. We will be dispatching a circular to the shareholders, who will be receiving Independent Advice Letter from Public Investment Bank, in their capacity as independent financial advisors to the non-interested shareholders. To The Edge’s question if this is a bailout: These companies are not in need of one!” says Afzal.

Furthermore, Afzal believes that the wholesale segment will be a major revenue driver for the long term.

According to a local analyst, the future earnings from the wholesale segment are enough to boost the fledgling Global Transit entities that have invested heavily in the cable.

“The current retail price of trans-pacific bandwidth is around US$60,000 (RM187,000) to US$80,000 per month per 10 GBps (or US$720,000 to US$960,000 per year for 10 GBps). Assuming an average price of, say, US$800,000 per 10Gbps, then GTL’s 1 Tbps can theoretically fetch somewhere close to US$76.8 million per year. While bandwidth prices do erode at around 18% to 20% a year, with an asset life of more than 10 years, the math works out very much in TdC’s favour,” says the analyst.

GTL’s unaudited nine-month results ended Sept 30 show a loss after tax of US$1.83 million and shareholders’ funds of US$9.58 million. With a price tag of RM105 million, this is a price-to-book ratio of 3.51 times.

As for GTC, which offers wholesale services from the Unity Cable, the unaudited nine months ended Sept 30 show a net profit of RM5.1 million and shareholders’ funds of RM7.07 million. Based on annualised earnings for this year and the purchase price of RM106 million, this gives a PER of 15.6 times.

TdC has also shown a stronger balance sheet due to the turnaround. As at June 30, TdC had zero borrowings and cash and cash equivalents of RM199.2 million. The borrowings were wiped out after the company raised RM1.07 billion from the disposal of DiGi shares. TdC is left with 27.5 million DiGi shares as at FY2009 ended Dec 31.

After the deal was announced last  Monday, the counter fell 18.2% to close at 63 sen. It ended last week at 66 sen.

Afzal maintains that he is in TdC for the long haul in order to spur the next phase of growth. While the company is still early in the international game, it certainly looks forward to exciting times ahead, he adds.

This article appeared in Corporate page, The Edge Malaysia, Issue 833, Nov 22-28, 2010