Profit slump second jolt to Telstra sale

CANBERRA - Telstra's second-half profit slumped 46 per cent, threatening to derail the Australian Government's plan to sell its remaining A$25 billion ($30.4 billion) stake in the nation's biggest telephone company.

Net income fell to A$1.04 billion in the six months ended June 30, from A$1.93 billion a year earlier as customers abandoned fixed-line telephones for cheaper cellphone and internet services.

Annual net profit fell to A$3.18 billion for the year ended June 30 from A$4.31 billion the year before - its lowest since listing in 1997.

Chief executive Sol Trujillo warned he may cut dividend payments because regulators are crimping the company's earnings, denting the prospects for the share sale. Telstra is among former phone monopolies worldwide, including Deutsche Telekom, that are struggling to stop customers defecting.

"It's going to be extremely difficult for the Government to sell without a guaranteed dividend," said John Guadagnuolo, at Equity Trustees in Melbourne. A sale to individual investors would be an "extremely courageous decision," he said.

Telstra, whose stock has plunged more than 50 per cent since the previous share sale in 1999 amid increased competition, maintained the highest dividend yield last year among Australia's 20 biggest companies and nearly twice the average.

Lower earnings and the threat to the dividend are the second setback this week to the Government's hopes of selling its remaining 51.8 per cent stake this year.

On Monday, Telstra scrapped plans to build a A$3.1 billion high-speed internet network, after failing to agree with the regulator on access fees for rivals. The Government had hoped the fibre-optic network, offering new services such as internet television, would have allowed it to sell shares in a company with greater prospects for revenue and earnings growth.

Trujillo has warned rules requiring Telstra to provide unprofitable rural services and subsidise access to its network are destroying its value.

Prime Minister John Howard has blamed Trujillo, who earned A$8.7 million in fiscal 2006, and his executives for talking down the company's outlook and said he won't be blackmailed into easing regulations.

Telstra shares have slumped 24 per cent since Trujillo joined in July 2005, prompting the Government to cut the amount it expects to raise from a sale to A$25 billion from A$33.8 billion.

The shares are trading at less than half the A$7.80 that the Government last sold stock for in 1999.

"We're certainly not buying shares at the current time," said Ross Barker, who holds Telstra in the A$3.3 billion he helps manage at Australian Foundation Investment in Melbourne.

"We're still unsettled like everybody else about the continuing regulatory warfare."

Senior ministers are scheduled to make a decision in the next few weeks on proceeding with a sale.

The Government has the option of transferring its entire stake into the Future Fund, an investment vehicle being run by former Commonwealth Bank of Australia CEO David Murray to cover pension liabilities for politicians, the military and bureaucrats.

Trujillo said he would prefer the Government to sell its entire stake to individuals, rather than transferring shares to the Future Fund.

"We do not want a situation where one investor holds a significant number of shares that it intends to sell over time, as this could place a lid on the share price performance," Trujillo said in a letter to shareholders released yesterday.

Some fund managers said a sale may not woo many investors.

"It's hard to see who'd want to buy stock in a company with falling earnings and such an uncertain outlook," said Craig Young, who helps manage about A$2 billion in Australian stocks, including Telstra shares, at Tyndall Investment Management in Sydney. "The Government will have to give the shares away."

Sales at Telstra's fixed-line unit, the biggest and most profitable division, dropped 5.8 per cent in the latest half to A$3.66 billion.

The number of telephone lines in service dropped 180,000 to 9.9 million and the number of local calls made fell 12 per cent to 7.4 billion.

Telstra says it must earn A$1.74 in its "growth" areas to cover every A$1 lost from its fixed-line business.

Internet revenue rose 35 per cent to A$1.02 billion as Telstra cut the price of its high-speed services. Sales at the advertising and directories unit Sensis rose 10 per cent to A$767 million.

Mobile-phone sales rose 7.6 per cent to A$2.49 billion as the company increased handset subsidies to attract customers. Text messages sent rose 32 per cent to three billion.

Slimmer margins at its faster-growing internet and cellphone units aren't enough to make up for the decline of its fixed-line business.

To deal with the problem, Trujillo plans to cut 12,000 jobs, or 23 per cent of the workforce, over five years, and increase spending to combine its voice and data networks into a lower-cost, internet-based system.

"We are going to continue to take tough medicine," Trujillo told analysts in Melbourne yesterday.

The company's workforce, including contractors, fell 6.2 per cent to 49,443 in the year to June 30.

Telstra's share of Australia's A$33 billion communications market has fallen to about 60 per cent from 80 per cent in 1997 as rivalry increases from companies such as SingTel and Vodafone.

- BLOOMBERG