Street Talk: Devilishly Difficult For Telstra
Brett Clegg
Australian Financial Review Page 2
02/26/2001
Copyright of John Fairfax Group Pty Ltd
The recent political hoopla surrounding our largest telecommunications carrier shows Telstra is no innocent. But as for the rumour that Ziggy and the boys are to hop into bed with Sir Richard Branson in the launch of his $US1 billion ($1.9 billion) Virgin Mobile USA venture, it's more than likely just hot air.
European mobile stocks have plummeted, Labor has hinted it will use Telstra as a social policy tool if it wins power, and the heat is increasing on the valuations of its IP backbone and pan-Asian mobile ventures with Pacific Century CyberWorks . In the words of one astute analyst, Telstra is stuck between the devil and the deep blue sea.
Not surprising, then, that it is working on several initiatives, including potential spin-off scenarios not yet revealed, in light of the organisational and capital market inflexibility it will continue to face if a Beazley government refuses to privatise the remaining 51 per cent of the company.
As for a tie-up with Virgin in the US, this column was told by a Virgin spokeswoman on Friday that she too had heard the gossip, but after investigating believed it was incorrect.
On the potential new initiatives, it is understood that the Big One a split between its retail and wholesale arms is not on the agenda. What is on is some form of separately listed vehicle that could be used by Telstra to pursue new ventures under a less politically constrained banner.
Maybe it's Pacific Access. The Credit Suisse First Boston scoping study is complete and it is believed the recommendation was to float the business, which includes the White and Yellow Pages. CSFB employed the investor relations consultants Orient Capital to survey major institutional investors on their views of an IPO.
Pacific Access is valued at up to $2 billion on historical revenues of $1.1 billion and estimated EBIT of close to $250 million. Whether it's the right time to pursue a float is another matter, given shaky equity markets. Street Talk has a gut feeling that something other than a Pacific Access IPO is brewing.
Cochlear query
Picture this: it's late Friday afternoon, bags packed for a two-week business sojourn to the US, ready to catch up with a few New York institutional investors and then hit an industry conference, when the phone rings.
Journalist: ``Hi. It's so-and-so from the Fin. Sorry to bother, but thought I'd better touch base on a bit of speculation doing the rounds. There's some whisper of a takeover in the wings is there anything happening?''
Executive: ``Er ... no. A takeover of us? It's the first I've heard of it. Nothing's happening as far as I know. Were there any names mentioned?''
Journalist: ``Not yet. Could just be tongue-wagging people trying to explain why your shares are at a record. I suppose one of the big US guys might have a crack. It's an attractive business, profits keep on rising and rising.''
The Cochlear triumvirate of the managing director, Jack O'Mahoney, the chief financial officer, Neville Mitchell, and the senior vice-president, design and development, John Parker, are in the unenviable position of boarding a plane for overseas when there is a suggestion that a foreign predator may be stalking them in their own backyard.
Forget Woodside and Shell. As one pundit mused, if an offshore group looked to acquire Cochlear it would be a travesty for the intellectual credibility of Australia. It isn't natural resources we are talking about, but one of the best technologies to have been spawned on our shores.
The usual suspect is the $US59 billion ($112 billion) medical device giant Medtronics Inc, for whom the $2 billion bionic ear manufacturer would be a drop in the ocean. Still, they'd have to cough up for it, given it is trading at 60-plus times 2001 earnings.
Yet if an American giant put up a bid at a substantial premium, investors would have to weigh up the short-term gain against the long-term potential. After all, if O'Mahoney is right and Cochlear can grow indefinitely at more than 20 per cent per annum, there's lots more to come.
Pacifica's low blow
Pacifica Group is teetering 4cents above a five-year low. Not surprising, either, given that its major US customer, General Motors, said last Thursday it planned to suspend production at almost half its North American plants.
Filled to the brim with inventories, the automotive giant is cutting back production as the US economy slows and demand plummets.
GM didn't say which vehicles were affected by the cuts, because this is commercially sensitive information. It would be interesting to know, as the sport utility unit of GM is Pacifica's major brake customer. Lined up for TollJust as a Beazley victory is being seen as a fait accompli in some political circles, the prospect of a placement by the logistics group Toll Holdings is increasingly a given among fund managers.
It's heartening then for Toll and its broker, Salomon Smith Barney, that despite such a widespread assumption the stock still rises or, as one fund manager says: ``If they went to the market they'd get their hands bitten off.''
Not that it needs the money. In its recent result, net debt fell from $31.4 million to a net cash position of $1.6 million. On SSB numbers, after the $144 million acquisition of Finemores, ARN Logisitics ($12 million) and the first stage of its Altona sale ($19 million), Toll's net debt to equity will rise to 80 per cent before falling to 65 per cent by June 30.
But when you're the belle of the ball Toll shares rose 55cents on Friday to a record of $15.70 you make sure that your suitors treat you right.
Management pain
Ah, the sweet scent of blood on the corporate carpet. It has been a profit season many would like to forget.
But while the typical punter on the street only has an AGM to voice their grievances, there are heavier hitters out there who speak volumes when they are peeved at the performance of management.
There have been many such incidents this season, but our two favourites tales have been particularly amusing.
Last week it was Peter ``Grumpy'' Morgan at Perpetual Investments, who tore strips off the hapless lads at the beleaguered paint maker Wattyl after they delivered an obscenely bad $3.65 million interim net profit.
Then there was Kerry Packer, who blasted Brad and Jodee at One.Tel, in which Publishing and Broadcasting holds a 17.4 per cent stake. The company seems destined for utter ignominy, yet the pair have been richly rewarded for their dismal performance.
We hear Big Kezza's displeasure with certain management teams extends beyond One.Tel, but as for that, it's a bit too close to home.
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