The Shoeshine Column: No Telecom turkey talk on intriguing Optus mobile bid

Friday 1st December 2000

Come on, Theresa. Are you interested or aren't you?

Into a maelstrom of speculation Telecom's Theresa Gattung dropped the strongest hint yet this week that the carrier is preparing to bid for Cable & Wireless Optus' mobile division.

The official line at the announcement of the unification of Telecom and AAPT's mobile arms was that the move would deliver a "focused business unit." On an Optus bid, no comment.

Nonetheless Gattung, who must have been painfully aware how desperate journalists were to connect the two, conceded a useful byproduct of the merger would be to allow a float or a sale of an equity stake to a partner.

As this is pretty much a precondition of an Optus bid the media took her comments as a disguised "yes."

Gattung's veil dance probably reflects two facts.

First, Optus has yet to issue any paperwork on its breakup so prospective bidders don't yet know for sure what's on offer, let alone at what price.

Second, Optus' mobile business is guesstimated to be worth upwards of $A10 billion ($13 billion) so it's clear Telecom couldn't bid alone at the best of times. It would need a partner or partners, necessitating discretion until a deal is done.

Among the chattering classes the favoured solution goes like this.

Optus has 3.1 million mobile customers worth, if $A10 billion is in the ballpark, $A3226 apiece.

Telecom has a million customers and AAPT 200,000. Combined they are worth, by the same calculation, $A3.9 billion.

The combined outfit - let's call it Telecom Pacific Mobile - would have a 35% share of Australia's 9.3 million users, ahead of Vodafone with 18% but behind Telstra with 47%. In New Zealand it would have around 66%, although that figure is disputed by Vodafone, which has most of the rest.

It would be worth a tad under $A14 billion.

Counting in its customers, and chucking in $A1.7 billion ($2.2 billion) of cash, Telecom gets 40%. Its partner, widely speculated to be Japan's NTT DoCoMo, puts in $A5.6 billion for 40%, and the whole thing is floated, with 20% going to the public for $A2.8 billion.

Telecom could also seek to pay for its "excess" by issuing shares to Optus. True, at the current weak share price that would dilute existing holders. But Optus' assets should be discounted for the general telco weakness too. In any case Optus would no doubt prefer cash.

The question is, can Telecom load a further $2.2 billion on to its balance sheet, which is already groaning somewhat under the weight of its $7 billion-odd of debt?

Looking at the balance sheet doesn't help much. The book value of its equity, at $1.13 billion, is way below its market value. Analysts point out its interest cover (free cash flow divided by interest payments) is well over four times, so there's still some room for manoeuvre.

The carrier could also opt for a lesser stake. Anything below 28% and it wouldn't need to put in cash.

And then there's the future of the Southern Cross Cable.

Telecom owns 50% of this, Optus 40%, and MCI Worldcom 10%. It's thought to be worth anywhere between $2 billion and $3 billion.

There is no obvious need for Telecom to hold any equity in the cable company now it's up and running. Selling into a float would raise, say, $1.25 billion.

So, ticking off a number of "ifs," Telecom probably can mount an Optus bid. Will it want to?

For starters much depends on price. Vodafone and Singapore Telecom are also rumoured to be interested and a three-way bidding war could push the price up beyond what Telecom would be able or willing to pay.

According to Australian reports, Optus needs $A8 billion to expand its network, build base stations and bid for spectrum. Although it's growing fast it will be some time before its cash flows will be able to support that level of capital expenditure.

In 1999 its operating cash flow was $A513 million and the outflow on investing was $A975 million.

Last year it took in $A587 million and spent $A1.61 billion.

Gattung said it hadn't been decided yet whether Telecom/AAPT would bid for 3G spectrum in Australia's upcoming auction.

But the dismay at the prices telcos were paying for spectrum around the world is beginning to dissipate. Australia's auction is looking likely to be as much of a damp squib as our own.

And Optus, almost all of whose customers use GSM phones, has headed down the opposite evolutionary path toward third-generation services than Telecom and AAPT, both of which are rolling out CDMA networks.

It's unclear how much this will affect Optus' value in Telecom's eyes.

For instance, Telstra is quite happy to run a mixed-pedigree network.

Shoeshine hopes Telecom is able to make a decision soon. He'd hate all those brokers wanting a piece of the action to have to keep their mobiles switched on over Christmas lunch.

Citic critic offends

It's a sign of how lowbrow Fletcher Challenge's forestry row has become that China's Citic has resorted to accusing FCL chairman Roderick Deane of racism.

It's a pretty specious charge. Deane said only that there had been cultural differences regarding the binding nature of contracts. Such differences could arise between a New Zealand company and one from the UK, the US, or Chile - just ask Carter Holt Harvey.

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