Analysts tip day of reckoning for the weakest link

By PETER GRIFFIN and REUTERS

Analysts expect Telecom to write down the value of its sickly $2.4 billion Australian subsidiary AAPT by June 30, the end of the company's financial year.

Merrill Lynch analyst Patrick Russel said a writedown of AAPT would follow an international trend for telcos to cut valuations because of poor financial results.

"Telcos globally are writing down assets they acquired over the 1999-2000 period when we had reasonably aggressive valuations," he said.

"This will be the year that they do it. It would reduce the goodwill going forward so they clear the decks for the next period."

AAPT is valued in Telecom's books at more than $2 billion, just under a quarter of Telecom's total assets of $8.97 billion, and generates negative cashflow of $200 million a year.

A report written by Russel did not estimate a write-down value for AAPT. Merrill Lynch estimates that AAPT aims to be cashflow positive by the next financial year.

Telecom shares would continue trading in the $4.50 to $5.50 a share range "until positive earnings and cashflow growth momentum is restored", it says.

Jeremy Simpson, telecoms analyst at ABN Amro, put AAPT's value at "substantially less" than the $2.4 billion Telecom paid for it.

But that had already been taken into consideration by the market, he said. ABN Amro was valuing Telecom at $5.50 a share.

Martin Freeth, a spokesman for Telecom, said no decision had yet been made "about valuing assets down, or up for that matter".

In his report, Russel said writing down the value of AAPT would help the group's overall free cashflow generation.

Telecom's recently completed $300 million debt issue was good news.

The issue had reduced Telecom's total short-term debt to an estimated $900 million from $1.6 billion at the end of last year.

Telecom will announce in May its results for the three months ended March 31 and, in August, the results for the following three months.

If and when the decision is made to write down the investment in AAPT, a drop in valuation would pale in comparison to some of the big hits global telecoms investments have taken of late.

Analysts are tipping Japan's Nippon Telegraph and Telephone to post a Japanese record loss of about 1 trillion ($17.2 billion) in the year to March.

Much of that is attributable to investment write-downs.