Australia's Telstra: Reach CEO Grieve Resigns
By Ambereen Choudhury Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--Telstra Corp.'s (TLS) dream of tapping Asia for future growth is in tatters Friday after the Australian telecoms company unveiled a US$546 million write-off of the Reach joint venture with Hong Kong's Pacific Century Cyberworks Ltd. (PCW).
Reach is Asia's largest international carrier of combined voice, private line and Internet protocol data services.
But like many it has suffered from stiff competition and overcapacity in global telecoms markets, sparking concern among investors three months ago when it confirmed it was in discussions with its financiers.
The announcement to the Australian Stock Exchange shocked Telstra investors, with the stock down 18 cents or 4.1% to a five year low of A$4.17.
Telstra Chief Executive Ziggy Switkowski said Australia's largest telecoms company has written down its 50% interest in Reach to zero, which equates to a non-cash write down of US$546 million or A$965 million in its first half accounts for fiscal 2002-03 to be released Thursday. Richard Li's company owns the other half of Reach.
"Contributions from good performances in Reach's international voice connectivity business are not sufficient to compensate for the sharp decline in data margins," Switkowski said.
"Significant changes to Reach's business model will be required as it confronts competitors using unorthodox pricing strategies or operating from a restructured cost base after emerging from bankruptcy," he said.
"Reach continues to be cash flow positive but no longer at levels that support Telstra's carrying value," Switkowski added.
The joint venture company originally raised US$2 billion from a group of eight banks led by Barclays and Chase Manhattan but scaled back its debt to US$1.5 billion after reassessing capital expenditure requirements.
Its bank syndicate has given Reach a waiver of its debt covenants to February 28 and discussions are continuing about extending that waiver to allow "orderly refinancing" of the debt, Telstra said.
"This can't be good. It is a huge gesture, to be able to writedown an asset to zero," said one senior institutional dealer.
WRAP: Australia's Telstra -2: Reach CEO Grieve Resigns
Reach's Chief Executive Alistair Grieve has resigned, to be replaced by Dick Simpson, who now heads up Telstra's operations in Asia.
Simpson has been identified as a potential successor to Switkowski and played a key role in the joint venture talks with PCCW three years ago.
Simpson ran Telstra's mobile division before moving to Hong Kong. He will stay on as chairman of Telstra's other Asia unit that operates CSL Ltd., the former mobile telephone assets of Cable & Wireless Hong Kong.
In July 2002, Telstra bought out PCCW from a joint venture that operated CSL. Telstra, which had 60% of the company, effectively bought PCCW's 40% stake for US$475 million. This transaction also was non-cash.
In a separate statement, PCCW said an impairment loss of approximately HK$8.26 billion arising from Reach will be included in its calendar 2002 accounts.
"The impairment loss on the company's investment in Reach will have no impact on revenue, profit from operations, EBITDA and cash-flow of the company and its subsidiaries and will not result in any noncompliance with respect to the debt covenants of the Group," PCCW said.
"The directors' decision in relation to the write down was made after consideration of the difficult and volatile trading conditions in the undersea and long-haul telecommunications sectors," PCCW said.
While Telstra rates as one of Australia's most profitable companies and has a hefty cashflow, PCCW isn't in such a strong financial position, analysts said. Despite this, Richard Li has been actively considering a bid for U.K.'s C&W, with PCCW making an approach in December.
Moody's Investors Service said Friday it doesn't plan to change its ratings on Telstra due to the Reach write-off.
"From our perspective, Telstra is sending us a very strong message that they are not going to throw good money after bad with this investment," said Charles Macgregor, senior credit officer at the ratings agency.
In a sense, the write off of Reach is more positive than negative, Macgregor told Dow Jones Newswires.
"We had concerns about how far they would go to support this investment," he said.
"You've got distressed assets that are coming back on to the market with lower capital costs and are now trying to get volume and that is seriously impacting upon the economics of that business," Macgregor said.
One senior institutional dealer agreed with Macgregor: "perversely it might not be too bad for Telstra as not too many people place too much value on it," he said.
At about 0005 GMT, Telstra shares were down 16 cents or 3.6% to A$4.21.
"There's no good news in this. The company was losing its monopoly position here and they went chasing growth offshore and this is the result," said one private client adviser.
"I think it will fall below A$4.00. The selling could go on for days," he said.
Switkowski will hold a press briefing at 0030 GMT to explain the reasons behind the write-off.
-By Ambereen Choudhury, Dow Jones Newswires;
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