No surprise, but Anderson still has aces up his sleeve
theage.com.au
BY MALCOLM MAIDEN
Thursday 28 September 2000
The pressures that have prompted Cable & Wireless Optus to announce a complete stocktake of Optus' corporate structure are not dissimilar to those bearing down on its competitor, Telstra.
But Optus chief executive Chris Anderson can contemplate more radical solutions than his counterpart at Telstra, Ziggy Switkowski.
Optus' big institutional shareholders were far from shocked when Anderson rang them this morning to advise them of the stocktake announcement. The group has been talking about alliances and joint ventures on brands and key assets including its multimedia and cable assets all year, and a full-scale review is the logical byproduct of the decision of Optus' 52. 5 per cent controlling shareholder, Cable & Wireless of the UK, to focus its energy globally on data and other business services, one of Optus' three core divisions.
The institutions did, however, welcome the news, becausethe stocktake committee of Optus directors and their advisers, Goldman Sachs and Ord Minnett (for Optus) and Merrill Lynch (for C&W), have some fascinating and potentially valuable scenarios to explore.
Optus shares are 45 per cent below their March high, and Telstra shares are 35 per cent below their high at the end of November last year. A substantial part of the decline is a result of a global re-rating of telecommunications groups. There are concerns that burgeoning telco capital expenditure budgets are beginning to erode profitability at the same time as profit margins are being squeezed by competition. The huge prices paid in Europe earlier this year for third-generation spectrum, which will be used to merge mobile telephony with the Internet, were the catalyst for the rethink, which has affected all listed telco companies. The 3G spectrum will be auctioned by the Federal Government early next year in Australia, and will probably cost the industry over $4 billion.
Telstra's proposed Asian joint ventures with Richard Li's Pacific Century CyberWorks were an attempt to show that new growth paths were available, and that expansion costs could be shared. The question now is, however, whether Telstra picked the right partner.
Anderson has not yet committed, and unlike Telstra, he is not burdened by history, or by government ownership. Radical break-ups, joint ventures and floats of various Optus assets can, and will, be examined. They will include options for the UK parent to exit with the data and business operations it covets, and rejigs of the corporate structure that introduce new partners, including international mobile companies such as Hong Kong's Hutchison group and Japan's NTT DoCoMo.
Similarly, radical surgery at Telstra is politically difficult, because of Telstra's role as the universal provider of telephony in Australia, and because Telstra is still majority owned by the Federal Government.
Telstra's universal service obligation does not extend to new assets such as mobile telephony, and there are mumbles again that a mobile float might be considered as a way to get those who subscribed to Telstra 2 privatisation shares last year back into the black ahead of their November 2, $2.90 a share instalment payment deadline. But any spin-off would risk allegations that Telstra was being privatised by stealth.
It would be an overstatement to say that Optus and C&W are brawling about the direction the Australian group will take. By any measure, Optus has been an outstanding investment for CW, even after the fall in its share price.
But C&W's evolving strategy worldwide is to focus on business and data communications, and a restructuring which sees C&W departure most likely. If that occurred, Anderson would need another senior partner to respond to the broad market concerns about the cost of Telco expansion, and Optus' remaining assets are excellent bait.
At the end of March, Optus had a third of the Australian mobile telephony market, and was picking up 43 per cent of new customers. The division posted an operating profit of $806 million out of revenue of $1.8 billion, for a gross profit margin of almost 45 per cent.
Optus' multimedia assets lose money ($125 million in the last year to March), but the urban hybrid fibre cable network and pay television network are desirable building blocks for cable companies, and for media groups. They have already been scoped this year by the Packers, by News Corp, and by the regional pay TV and cable group, Austar.
It's not an easy deal to do: Optus wants a big price, reportedly $4 billion plus, and Austar's best offer was heavily weighted towards paper. Talks with the Packers raised the prospect of a marriage with PBL's 80per cent owned, listed ecorp/ninemsn Internet vehicle, but the Packers wanted mobile telephony revenue channelled into the new venture, something Anderson baulked at.
The basic equation is, however, intact: Optus' cable and pay TV business is attractive to content providers and other vision generators and distributors, and is increasingly so as interactivetelevision develops. Down the road at Telstra, Ziggy Switkowski and his team need to respond to the concerns about the group's expansion strategy in general, and in particular, concern that the sharp fall in the share price of its erstwhile Asia business partner, PCCW, has left Telstra potentially overpaying for the alliance. If the terms cannot be renegotiated, Telstra will probably walk.
The tougher job for Telstra is to convince the market that its overall growth strategy is sound, and to do so in a way that does not raise concerns that Telstra is running an ad-hoc agenda that is forcing about-faces on investments including, possibly, PCCW.
That's not an easy task in this sceptical market, and Ziggy Switkowski probably wishes he was holding the restructuring aces that Anderson is capable of playing.
The Maiden family owns Telstra shares. |
