Aust telcos including AAPT expected to rachet up competition

By NZPA

Wednesday 19th February 2003

International ratings agency Fitch Ratings expects competition in the Australian telecom sector to re-intensify after a brief hiatus from pricing pressures over 2002.

It also warns Telecom's Australian arm AAPT could be under increased ratings scrutiny as the pressure goes on to increase dividends.

The agency's 2003 outlook for the industry, released today, said it believed an aggressive launch of 3G services by Hutchison, a partner with Telecom, would be a catalyst for renewed pricing pressure in the mobile sector,

Repercussions would also likely to felt by fixed line services, it said.

Other causes for increased competition included slowing economic growth, slow recovery of business confidence for corporates and small-to-medium-enterprise businesses, and the impact of regulatory developments.

Australian telcos were also suffering from low sector revenue growth despite the region's sound economic performance, Fitch observed.

Leading operators had been focusing on and were expected to continue their efforts to maintain margins and improve cash flow, and capex would continue falling in 2003 with a possible rebound from 2004.

Fitch also believed there would be inevitable rationalisation with a gradual falling away of smaller payers, although no major developments are anticipated in 2003.

New Zealand's Telecom owns AAPT's, Australia's third largest telco player which has been cutting less profitable subscribers from its books to try and boost margins.

Fitch noted Telecom and SingTel Optus had been working hard to improve margins and cashflow and reduce debt, which was reflected in their stable credit rating.

"However, the difficult conditions experienced in the region have heightened awareness about the need to address shareholder returns.

"Fitch says initiatives such as M&A (mergers and acquistions) and increased dividends, which may be positively received by shareholders but are usually detrimental to bondholder interests, are to be the most likely catalysts for near-term rating action."

Debt funded M&A activity, declining margins and increased subscriber incentives in the wake of aggressive competition were probable causes for ratings action in the wider telco sector, the agency said.

Other possible factors were high or increased dividend payout ratios and the failure to improve credit protection measures in response to the continuing tough market conditions.

Of the major operators, the agency considers number one telco Telstra to be the most under pressure to increase shareholder returns.

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