Confirmation of talks on AAPT send Telecom shares soaring

By NZPA

Wednesday 12th October 2005

Telecom's value soared nearly $300 million today on speculation it could sell AAPT or ally the troublesome Australian unit to a third party.

Telecom's shares jumped 11c, or 1.8%, following an Australian Financial Review (AFR) article today raising the prospect of a sale or alliance and they rose another 5c to $6.16 when the company confirmed it had been in discussions.

"We were approached, so we haven't hung up our shingle," investor relations manager Philip King said. "This is a natural feature of the industry we're in - where parties talk to each other all the time."

The proposals were "not inconsistent" with Telecom's stated position that much of its future growth would come from Australia, King said.

"We have indicated before we are committed to a presence in Australia.

"Some engagement has been occurring, however there is no proposal on the table and we remain open to consider alternatives as and when they arise,"

King emphasised the Australian market was "dynamic and characterised by change", which analysts interpreted as a signal change was afoot.

"It's the nature of the industry we are in - you have to constantly evaluate where you are best placed and what makes best sense," King said.

AFR said the telecom industry dynamics had been changed by new Telstra boss Sol Trujillo's likely decision to downgrade the importance of Telstra's wholesale division as part of a strategic review.

Investment bank Citigroup for months has been advising on Telecom's options in Australia and whether it needs to pursue a new strategy.

Telecom bought into AAPT in 1999 and eventually paid $2.2 billion after a bidding war with Cable & Wireless Optus at the height of the telecommunications boom. AAPT has always been a financial drag and in 2002 was written down in Telecom's books by $850 million to $1.5 billion.

However, analysts doubt even that value and estimate it is at best worth half that figure, and, at worst, worth nothing. Telecom's share price already reflected the lower value, one analyst said.

AAPT has struggled in the business market, which Telecom wanted to develop as a way of selling its trans-Tasman capabilities to companies operating in both countries. In August, AAPT posted a $50m decline in business division revenue, reflecting intensified competition.

Professional investors welcomed news of a change in AAPT ownership.

"The removal of that area of risk, particularly if they were to get something for it, would be viewed as a positive," said Goldman Sachs JBWere broker Murray Rutherford.

"It has been a drag and over the history of AAPT, it has had to run hard to stand still."

Telecom has budgeted $140m in capex for AAPT this year and another $20m for yet another restructuring of its consumer division.

"This is capex and op-ex being spent on an operation that is struggling to succeed," Rutherford said.

In the most recent quarter, AAPT still showed itself to be a laggard with total revenue declining 1.2%.

JPMorgan analyst David Wilson valued AAPT at $A760m, AFR reported. He said it had a 5% share of the $A28 billion Australian telco market.

He based his valuation on an earnings multiple of nine times estimated 2006 cash earnings before interest, tax and amortisation of $A191m.

AAPT's consumer division is primarily a fixed-line phone business with 440,000 customers and revenue in 2005 of $A600m.

The business division had revenue in 2005 of $A671 million, down 6.4% on 2004. AAPT earned a net profit of only $A3 million in the June year, down from $A19 million in the previous year, but delivered $140m in free cash flow in the June year. However, the latter is expected to fall to $100m this year.

AAPT owns 19.9% Hutchison's third generation mobile network, which it paid $A450m for in 2001.

AFR said the most likely buyers of AAPT would be Optus or Vodafone. It also noted Optus's Singapore-based parent company, the cash rich SingTel, could easily swallow all of Telecom. Telecom has an open share register, although any buyer acquiring over 10% needs government approval.

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