Telstra's latest bad month

06 Sep 2006

Sinking profits, a slumping share price and an ongoing battle with regulators are threatening to derail the Australian government's plan to sell its majority stake in Telstra this year amid calls for the sacking of the company's chief executive Sol Trujillo.

August was full of controversy for Australia's leading telco as Trujillo went on the offensive against regulatory body, the Australian Competition and Consumer Commission, and attempted to force the issue on its prices for wholesale customers.

First, Telstra cited regulatory uncertainty for abandoning plans for its planned A$4 billion ($3.06 billion) fiber-to-the-node network, saying the decision was a 'casualty' of confused and inconsistent regulatory policy.

As the market was digesting the fall-out from that decision, widely interpreted as another pressure tactic aimed at the government and the ACCC, Telstra then announced full year financial results for the 12 months to June 30 showing a 26% fall in annual profit to A$3.18 billion, the biggest year-on-year fall in profits since listing in 1997.

The result was even more dramatic in the second half of the reporting period, with profits down 46%.

The profit announcement was then followed by another regulatory setback, with the ACCC releasing a draft ruling setting the price that Telstra can charge one of its rivals for access to its lines in suburban areas at A$17.70 ($13.50) a line, well under the A$22 a line on which Telstra has based its 2007 profit forecast.

The ruling, which could be applied across the board to all of Telstra's wholesale customers in suburban areas, immediately undermined Telstra's assumptions on its revenue, earnings and dividend payouts and sent the shares plummeting to A$3.67, barely above the 52-week low of A$3.60 reached in March.

The falling share price means that the government's 51.8% stake in the company is now worth barely A$24 billion ($18.3 billion), against the A$32 billion it was worth when Trujillo took up his position in July last year. The A$3.67 share price compares poorly with the A$7.40 investors paid for Telstra shares in the 1999 T2 offering, and the bearish sentiment could scupper the government's plans for a T3 retail offering of its remaining shares this year.

Finance Minister Nick Minchin, who is responsible for the sale, has said that a retail offer is now looking 'less likely' although no final decision has been made.

If the sale is cancelled, the government is likely to put its 6.44 billion Telstra shares into its newly formed Future Fund established to pay the ongoing pensions of the public service. The original plan had been to sell the shares in the T3 float and putt the proceeds into the Future Fund for further investment.

The controversy over Telstra has put the spotlight firmly onto Trujillo, with local reports contrasting his A$8.7 million annual pay packet with the fact that the company had declined 25% in value under his tenure.

West Australian member of parliament Don Randall called for Trujillo to be sacked, saying Australia should 'cut its losses' and that the US-born executive had 'done a very ordinary job.' Both Prime Minister John Howard and Communications Minister Helen Coonon have refused to publicly support Trujillo.

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