AAPT risk to S&P rating

By Richard Braddell

WELLINGTON - Telecom got 30 per cent more of AAPT than it is thought to have wanted, but is still seen in a strong position to capitalise on the strong growth expected from Australia's third-ranked telephone company.

Telecom yesterday confirmed that it had acceptances for 81.52 per cent of AAPT, although that would dilute to 78.24 per cent if options held by its management were exercised.

But the $1.5 billion investment could lead to a downgrade in Telecom's credit rating, which has been on Standard & Poor's credit watch negative since the AAPT bid was announced.

However, one analyst said that while people would worry about the impact on Telecom's capacity to pay dividends in the short-term, the reality was that an investment that was going to grow much faster than Telecom itself was going to do far more for the bottom line in future.

Furthermore, book values in Telecom's balance sheet did not reflect market values and with net debt equal to about 25 per cent of market equity, the company did not look particularly stretched.

A Telecom spokesman, Angus Barclay, said the AAPT investment would be fully debt-funded, but declined to comment on analyst speculation that Telecom could seek to dilute its holding through one or more issues of AAPT equity on New York's Nasdaq exchange.

However, Telecom is not expected to act as banker to AAPT, given its own capital requirements for cellular, new switches and so on.

An equity issue by AAPT would provide substitute funding for the debt it is expected to raise for planned expansion and would accelerate its growth in profit.

But while Mr Barclay said that Telecom had bought into AAPT on the basis that it would be profitable from day one, an analyst said interest costs to fund projects such as its CDMA cellular network could exceed $40 million and would bite into bottom-line earnings, even although AAPT was expected to be profitable at the operating level in 2001.

But while Telecom ended up with more than the 50 per cent regarded as the highest optimum shareholding, the fact major shareholders, Cable & Wireless Optus and AAPIS have left the register leaving behind long-term institutional shareholders is seen as advantageous.

Holding less than 50 per cent at this time would be preferable given the requirement to consolidate debt over that level and AAPT's heavy cash demands, while full ownership would be preferable when it starts chucking off meaningful cash in perhaps five years' time.