Forum Archive Index - October 2000

["Talacek, Philip " <pjt57@elec.canterbury.ac.nz>]

I have a question for those with more accounting knowledge than I.  As we
are all aware Telecom has spent up big purchasing a stake in AAPT (this post
isn't to debate the merits of this decision).  This has placed pressure on
their balance sheet and cash flows as it will be years before Australia
starts to provide Telecom with equivalent free cash flows to that which
their banks, bond holders are now entitled to.  

Telecom's solution (one which clearly they have put off for as long as
possible) is to cut dividend pay outs in half.  So we go from the situation
(the following figures are meant to be only indicative to demonstrate the
point)
Profit before tax :  $1,200m
Tax : $400m
Net profit : $800m
Dividends : $800m
Change in imputation credit account : $0
Spare Cash : $0m

To the new situation
Profit before tax :  $1,200m
Tax : $400m
Net profit : $800m
Dividends : $400m
Change in imputation credit account : +$200m
Spare Cash : $400m
Great, there is now an extra $400m that was not available before to pay
those ever mounting mortgage bills.  But what I can't understand is why they
are choosing to pay $400 a year in Tax when they have all that goodwill
associated with the AAPT purchase sitting on their books.  Could they not
have written off enough of it in last year (to June 2000) so this tax year
they paid only enough tax so that the $400 dividend is fully imputed, but no
extra money is paid to the government which fails to provide benefit to the
shareholders.  I figure this would free up approximately an extra $200m a
year in cash to help pay that interest bill while providing the same
payments to shareholders as currently proposed.  This  is demonstrated below
Profit before tax :  $1,200m
Loss Carried Forward from goodwill write off $600
Tax : $200m
Net profit : $400m
Dividends : $400m
Change in imputation credit account : +$0m
Spare Cash : $600m

Now I can think of two possible reason that this was not pursued by Telecom:
1) I'm an accounting idiot who has just proposed a scheme which is illegal.
But when radio Otago and Radio Pacific merged I remember all the goodwill
being written off in that tax year.
2) A quick write off of the goodwill will result in negative shareholder
funds or close to it.  But every one knows this anyway, you don't need to be
a genius to look at Telecom's balance sheet and see this for your self.  Is
it just not the done thing to have brackets around that figure?

The thing which gets me, is that for goodwill to be amortised over 20 years
in the Telecoms market is laughable.  The tacit assumption of doing so is
that the customers acquired in the deal will still be with you in 20 years.
Now no one here believes that this will be the case in a technology driven
industry in which the demands from customers are being reinvented closer to
every 5 years.  So my question is would my scheme fly, or is there a good
reason why Telecom is paying $200m more to the government than share holders
would like to pay?

Philip Talacek  

Disc: Hold TEL

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