Market wary of Telecom earning power

By RICHARD BRADDELL telecoms writer

Telecom announces its first-half profit today, against a backdrop of a share price that has been buffeted by uncertainty over its profitability, and speculation on its Australian bid for Cable & Wireless Optus' cellphone assets.

On Tuesday, Telecom's shares rose 21c after its half-owned Southern Cross cable network said it was $US500 million ($1.15 billion) in the black.

But yesterday they were down 22c, not helped by speculation that Telecom might be even further out in the cold on Optus than was previously thought.

Telecom's volatility has not been helped by the wide variance in forecasts for today's profit announcement. These range from $289 million to $330 million.

Analysts have been uncertain how much of Southern Cross' profit should be factored into the full year, although one suggested a $190 million contribution, taking his full-year forecast to $755 million.

Many analysts have not attempted forecasts.

The break-up of Optus has been generating a flow of speculative stories from Australian journalists that have not been good for Telecom.

As the tussle develops, the least forthcoming of the three bidders usually cited, Singapore Telecom, looks to be in the best position. It has the money for a cash bid and as a new entrant to Australia, it faces no competition issues.

Telecom's bid is also unlikely to raise any regulatory issues, but if it is to fend off SingTel and Vodafone, it will have to pull a rabbit out of its hat in terms of putting together the financing, which will most likely involve an equity partner.

At this time, Telecom has no obvious candidate, despite Japan's NTT DoCoMo being considered a likely partner when the Optus sale first came up last year.

Control of Optus looks increasingly like being a battle between SingTel and Vodafone.

As yet, Vodafone has to find a way of satisfying Australia's competition regulator, the ACCC, that it can make divestments sufficient to ensure that an acquisition by it will not substantially lessen competition.

To achieve that, it has proposed selling half its two million customer base, but not its network infrastructure, to Hutchison, a lesser player in the Australian market.

While the ACCC will investigate this over the next two weeks, there is doubt in Australia that this sale plan will be enough to carry the day.

In the end, the result may be decided by how determined the deep-pocketed Vodafone is to secure Optus' cellphone network of 3.4 million customers.

The test of that may turn out to be its willingness to dispose of even more, perhaps its entire existing network, in order to gain control of Optus.

The Australian media yesterday speculated that if Hutchison gained control of part of Vodafone's network, it might sell to Telecom its CDMA assets, which are geographically complementary to those that Telecom-owned AAPT has been building.