Qwest, KDD in talks to form Asia joint venture

Qwest Communications International, the swashbuckling telecommunications company that two months ago captured US West Inc, is now taking on Asia.

Denver, Colorado-based Qwest and Japan's KDD Corp are in talks that, if successful, would set up a joint venture giving the US communications and internet company its first foothold in Japan -- the world's second largest telecommunications market -- and access to a high-speed network throughout the Asia-Pacific region, according to people familiar with the negotiations.

The deal would give Qwest an opportunity to expand its internet backbone-based services for international businesses, especially US automobile companies with ties to Japan's large manufacturers, and US west coast-based import/export companies, according to JB Haller, vice president for telecomms analysis at Current Analysis Inc in Sterling, Virginia.

The proposed deal would also allow KDD, Japan's former international telecomms monopoly, to cut its costs of providing network access to the US, and give it a much-needed cash infusion.

The negotiations started last year and could be completed within a month, the sources said. Officials from KDD and Qwest continued the talks in Tokyo on September 9, but would not reveal details of the negotiations.

"Everything is [too] premature for us to comment," said Michael Murphy, Qwest international vice president, from his Tokyo hotel room on the day of the meeting.

An agreement between the two would unite a sort of aging aristocrat of Japanese telecommunications with a fast rising "next-generation" communications provider. KDD, once Japan's second largest telecomms company, has been battered in recent years by competition in Japan's international telecomms market. Eleven-year-old Qwest, which went public in 1997 and is a fledgling by telecomms standards, aspires to become a global provider of advanced internet and broadband services -- such as videoconferencing and transaction clearing -- that run over its high-speed, fibre-optic backbone.

Qwest's goal, officials say, is to compete with full-service global telecomms operators like MCI WorldCom, which are also building global "end-to-end" communications services. Expanding from its US roots, Qwest in the past year has pushed into Europe through a joint venture with Koninklijke KPN NV of the Netherlands. The venture, Qwest KPN, is about to launch an IPO (initial public offering), and plans to build a fibre-optic ring network throughout western Europe. The fibre-optic network will help push Qwest's vision of full-service, broadband applications in Europe.

The proposed KDD joint venture would be the Asia-Pacific leg of that strategy. The plan that was discussed on September 9 calls for the two companies to take equal stakes in a joint venture that would run an Internet Protocol-based network to the US and possibly throughout Asia, according to people familiar with the negotiations.

Qwest would likely invest cash in the joint venture while KDD would offer, in part, its existing internet business, including an extensive fibre-optic network, engineers and possibly its domestic network in Japan, the sources said. KDD owns the largest optical-fibre capacity to the US of any Japanese carrier and shares circuits to all major markets in Asia.

The companies would have equal representation on the joint venture's board and management, the sources said. The companies on September 9 also discussed setting up an executive-level task force to help close the deal promptly, they said.

The importance of the talks for Qwest could extend beyond the joint venture. Separately, KDD is in talks with national telecommunications carriers in Singapore, China and Taiwan over how to jointly offer internet-related services throughout the region, the sources said. Top officials from those companies discussed internet services at KDD's Tokyo headquarters on August 26, according to one person familiar with the talks. The companies would not comment on the negotiations.

Qwest's interest in Asia comes as sweeping changes in Japan's telecommunications market are pressuring KDD to find a strong partner. Recent deregulation erased lines that neatly separated Japan's carriers into domestic and international carriers. In addition to a rabble of new foreign competitors, KDD will now face off with Nippon Telegraph & Telephone Corp, Japan's dominant domestic carrier and a company more than 25 times larger than KDD in terms of market capitalisation. Those new challenges come on top of 15 years of competition spurred by deregulation, cutting deeply into KDD's main-line international voice business.

The company last fiscal year saw its consolidated ordinary income fall 75 per cent year-on-year to 3.8 billion yen (US$355 million) on revenues of 406 billion yen ($3.7 billion).

On its own, KDD lacks the financial horsepower to keep up in an investment race led by larger, richer rivals. The rapid demand for data networks has taxed the small company's ability to make crucial purchasing decisions quickly. For instance, based on a decision it made three years ago, KDD is now expanding its ATM (asynchronous transfer mode) network with switches from Cisco Systems while industry leaders are using more advanced switches from Ascend Communications, said one KDD engineer.

What's more, KDD has made massive outlays to compete in the domestic market. The company's expenses swelled last year due to a merger with local carrier Teleway Japan Corp and investment in what it calls the "Japan Information Highway," 10,300kms of undersea cable encircling the Japanese archipelago.

"This expansion is much more rapid than we can support especially from a hardware point of view," said one KDD manager. "We need cash to expand domestically."

KDD initially turned to AT&T, the telecomms giant, according to people involved in KDD-AT&T talks, considered taking a controlling stake in KDD. But a year ago, AT&T launched a global venture with British Telecommunications and soon found itself dragged into a partnership with KDD rival Japan Telecom. When the dust cleared KDD was left without a suitor.

The talks between Qwest and KDD gradually gained speed from last year with meetings between KDD's president, Tadashi Nishimoto, and Joe Nacchio, Qwest's chairman and chief executive officer. At one point, Qwest considered taking a controlling stake in KDD but eventually the talks shifted to setting up a joint venture, an individual involved in negotiations said.

Earlier this year, the two exchanged teams that assessed each other's technology and roughed out the direction of the partnership, including what types of customers the venture would target.

But as the talks advanced, Qwest launched its bold bid for US West, which had already agreed to be acquired by Global Crossing. The month-long battle ended when Qwest successfully won US West's hand, but the struggle delayed talks with KDD.

Now that negotiations are back on track, some observers expect other potential partners to enter the picture. Even if the joint venture is set up, Qwest and KDD would still lack a strong partner in Japan's market for local services. Some industry observers speculate that KDD might team with one of Japan's mobile-phone operators while others expect that US carriers might approach KDD with fresh proposals.

"This might be only the beginning for KDD and Qwest," said Toshibaki Iba, a senior analyst at Tokyo-Mitsubishi Securities in Tokyo. "I'm sure there will be more deals to come for both of them."

International expansion is a must for Qwest, facing tough competition from MCI WorldCom's UUNet division, which right now has the world's largest internet backbone network, said Current Analysis' Haller.

"Qwest also wants to be a player in the applications hosting business and it is imperative for a company like this to play in the Asian market," Haller said.

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