Aussie carriers mull M&A

10 Mar 2006

Recent results from market leaders Telstra and Optus and the massive write-down in the value of Telecom New Zealand's subsidiary AAPT have underlined the tough state of the Australian telecoms market and a likely trend toward consolidation.

Telstra chief executive Solomon Trujillo was blunt in his assessment of the company's outlook recently when he announced a 10.3% drop in interim net profit, which came in at A$2.14 billion ($1.57m).

'The financial trends at Telstra are not good,' Trujillo told analysts. 'We've got a cost structure we can't afford.'

Telstra is struggling with a high cost structure and a decline in revenues from its traditional fixed-line business and is yet to benefit from the uptake in new services such as broadband and 3G mobile. It is also in dispute with the country's competition watchdog, and says it is refusing to spend A$3 billion it has earmarked on a network upgrade until it is promised a better regulatory deal once it is sold.

The company is predicting a 26% fall in full-year earnings, a forecast which is continuing to depress its share price and place in jeopardy the upcoming sell-off of the Government's remaining 51% stake in the company.

Estimates of the value of the float have come down from around A$35 billion to around A$25 billion as the share price has fallen 20% since Trujillo took over in July last year.

At Optus, the SingTel subsidiary saw its growth story interrupted by recent third quarter results that showed a 4.8% fall in net profit to A$160 million. The mobile division has traditionally been the engine of growth for Optus, providing around 70% of its revenue, but the company has recently seen its market share slip from 35% down to 32%.

With this in mind, Optus recently bought out Virgin Mobile's Australian operation for A$30 million. Virgin has also found the saturated Australian market hard going and has opted for a 15-year licensing agreement for Optus to use its brand in Australia.

Optus is reportedly in talks with TNZ to buy AAPT, the value of which was written down by A$813 million ($616 million) to A$628 million in the Kiwi company's recent results. Operating earnings at AAPT have slumped from more than A$600 million in 2001 and the company will struggle to make A$30 million this year.

Optus has also been linked to Vodafone, which is number three in the Australian mobiles market, with speculation that the company could sell its networks to Optus and cut a deal to run its branded voice and data services on the Optus network, as Virgin does.

This would satisfy the Optus need to expand, and Vodafone's need to cut costs but to keep its brand active in Australasia, where it is a strong competitor in New Zealand.

The other player in the A$11 billion Australian mobiles market is Hutchison, which has a market share of less than 5%. Hutchison recently announced a A$80 million network upgrade to move its existing 400,000 customers on second-generation brand Orange to 3G brand 3, but the company is still a long way from profitability.

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