Telstra about to face a revitalised competitor
By MALCOLM MAIDEN
Monday 26 March 2001
Cable & Wireless Optus is the only group in Australia capable of competing across the board with the industry giant, Telstra, and, for that reason at least, consumers are best served by Singapore Telecommunications' takeover offer for the company.
The rival bidder, Vodafone of the UK, was always only interested in Optus' profitable and growing mobile telephony network. If Vodafone had won the auction, Optus' departing 52.5 per cent shareholder, Cable & Wireless UK, would have held on to the Australian group's corporate communications franchise, which is its focus worldwide. Another buyer would have been found for the cable and multimedia operation, and Optus would have been spread to the wind.
SingTel, on the other hand, apparently intends to run its new Australian subsidiary head-on against Telstra, as Optus has done since it was handed the nation's second telecommunications licence in 1991.
The three-tier bid SingTel will announce today will be for the entire company. SingTel has no intention of selling Optus' corporate telecommunications franchise to Cable Wireless UK, sources say.
SingTel is also understood to have decided to retain the Optus corporate and commercial brand in Australia, and has also indicated its intention to retain the services of the local company's top management, which is led by chief executive Chris Anderson.
If all that happens, the group will essentially continue to do what it has done, but with a committed controlling shareholder behind it instead of an unhappy one.
The telecommunications market has changed significantly since 1991, when Optus began and Telstra's monopoly became a duopoly. It is now open to any company, and Telstra's and Optus' competitors in various business segments are legion. But the threat of competition is, if anything, weaker than it was a year ago: many players are struggling to meet huge capital expenditure demands, and telco company share prices have been falling from historic (and insane) highs for the past 12 months. In that environment, there is little national interest in the dismemberment of Telstra's only comprehensive competitor.
One of the ironies of the Optus auction that has been running for more than half a year is that Telstra's biggest competitor faced a break-up at the same time as Telstra was implicitly endorsing the Optus growth strategy by copying it.
Telstra's chief executive Ziggy Switkowski and the head of Telstra retail, Ted Pretty, have both said in recent months that Telstra would increasingly offer customers bundled-up services such as data, mobile telephony and standard telephony to maintain earnings momentum in a tough market.
That is the same strategy that Optus chief executive Chris Anderson has been deploying pretty much since he took over at Optus in September 1997, and it has worked: SingTel's $17 billion offer values Optus at $20 billion after debt inside Optus is taken into account, which means that about $17 billion of value has been added since Anderson arrived. Under his leadership, the group has moved from an annual loss of $560 million to what will be earnings of more than $400 million in the current year to March 31.
Optus' best business, mobile telephony, continues to grow: it was half as big as Telstra's mobile business when Anderson took over, and is now 75 per cent. During the auction of the company, Optus executives argued that bundling could continue if the group was broken up, as long as the new owners cooperated on marketing. But such alliances tend not to last, and those same executives can now admit that they always wanted to keep the company together.
A counter-offer for Optus cannot be ruled out, although the obvious candidate, Vodafone, quit the race yesterday, and SingTel will this morning lock up 19.9 per cent of Optus in a side deal with Cable & Wireless.
SingTel intends to list in Australia after the Optus purchase. It is still 78 per cent owned by the Singapore Government, something that will certainly be considered by the Federal Government as it scrutinises the deal. But there is unlikely to be significant political opposition, given that Optus is already majority controlled by a foreign company, C&W, and given that Optus under SingTel's control will continue to be the most visible competitor to Telstra.
The core offer of $4.50 a share is split between SingTel shares and cash, and will be accompanied by a slightly cheaper all-cash alternative, and an all-share alternative that values Optus at more than $4.50.
C&W UK is under pressure at home, where its shares have tumbled by 73.5 per cent in a year. It lost a fortune on paper after accepting overpriced Pacific Century CyberWorks shares in Hong Kong as part consideration for the sale of its Hong Kong telecommunications business to Richard Li, and would prefer to inherit as little SingTel paper as possible from the sale of its 52.5 per cent Optus stake.
The final split between cash and shares for it and every other shareholder depends on how many shareholders accept the share alternative, which is being made as attractive as possible by SingTel. The Singapore group's shares are relatively highly valued compared with other telcos, and shares issued in the takeover will come from the Singapore Government's holding (the government will continue to have majority control, however).
All that suggests the cash offer could be rushed, but shareholders who accept SingTel stock will avoid capital gains tax, which could be considerable. Small shareholders paid only $1.85 a share in the $2.2 billion float of Optus in November 1998, and institutions paid $2.15 a share.
The share-scrip offer is pitched at a 12.8 per cent premium to Optus' closing price last Friday of $3.99 a share. It is, of course, well below Optus' record high of $7.48, set last March at the height of the tech-stock madness. But the premium over the current market is actually better than it looks, because everybody knew a bid was coming: in the absence of that speculation Optus would have been trading around $3.50, perhaps lower: shares changed hands last December at $3.31.
mmaiden@theage.fairfax.com.au
This story was found at: theage.com.au |
