Telcos can sneak late try to C&W goal line

By RICHARD BRADDELL utilities writer

By rights, Singapore Telecom should be a shoo-in to buy Australia's Cable & Wireless Optus. Rival bidder Vodafone should be trapped in regulatory red tape and Telecom lost in the desert because it has no funding.

Or so the common wisdom has had it.

But the race for control of Australia's second-largest carrier is taking on dimensions which suggest that Vodafone is far from out of the game, while Telecom may not come away empty-handed either.

To be true, Telecom will end up with much less than it had hoped for when it teamed up with Japan's NTT DoCoMo last July and took a proposal to Optus' British parent, Cable & Wireless, to take over Optus.

That plan went nowhere, possibly because of resistance from Optus management. And with a disillusioned DoCoMo casting its eyes towards the US, Telecom no longer had the muscle to manage it alone.

Nevertheless, Telecom was there when C&W decided it would put Optus up for sale at the end of last year. Perhaps it hoped that DoCoMo might return to the fold, but there is no evidence that will happen.

As the Optus sale process moves on, it is far from impossible that there will be spoils more suited to Telecom's chequebook, particularly, as seems likely, SingTel is not the foregone conclusion it once seemed.

Indeed, SingTel appears to have a lot against it. The positives are that its cash-and-shares offer is at a healthy 18 per cent premium to Optus' $A3.87 ($4.61) market price, and there are no regulatory constraints.

Furthermore, its bid is attractive to Optus' management because SingTel would keep the company intact, and thus their jobs.

But there are some big buts. First, Australian institutions, which will have to accept the offer, do not want SingTel scrip because it is not in any Australian Stock Exchange index.

If they take SingTel stock, they will have to sell it, and given that slow-growth SingTel is already valued at multiples close to double its international peers, unloading by Australian institutions could put its price under serious pressure, particularly since only 22 per cent is in free float.

And while SingTel might look every bit the white knight to Optus' management, its owners are almost certainly not of the same mind.

C&W has already had the salutary lesson of crashing values when it took PCCW scrip in part-payment when it sold Hong Kong Telecom. It may be less than well-disposed to SingTel given that only $A2.35 of the $A4.60 a share offer is in cash.

Re-enter Vodafone. Cash is king and Vodafone has plenty, which is why it is still a serious contender despite serious regulatory hurdles.

Not only that, while Optus' management would naturally want to keep the company intact, Vodafone has the added attraction of wanting to sell back the data and business services, an outcome that would be consistent with C&W global strategy.

But before any of this can happen, Vodafone must satisfy Australia's regulator that the huge jump in cellphone market share that would result will not substantially lessen competition.

To do that, it has proposed halving its present customer base to one million customers in an agreement with fourth-ranked cellphone operator Hutchison.

That may not be enough. The Australian Competition and Consumer Commission is going through Vodafone's submission and is expected to rule next Wednesday.

What may be weighing on its mind is that if Vodafone gets Optus, there will only be two sizeable cellphone infrastructure networks remaining in Australia.

And this is where Telecom may yet return to the game.

Another national network may have to be built, and that presumably would have to be done by Hutchison. The expectation is that the network will leapfrog existing second-generation technology, going straight to third generation.

Another potential difficulty, as some see it, is that Hutchison's controlling shareholder, Hutchison Whampoa, may be unwilling to inject further cash.

Fortunately, Telecom still has money to spend and so would make an ideal partner.

Unquestionably, scenarios still abound. But for C&W, there must be a tinge of regret that it did not grab Telecom and NTT DoCoMo last year.

Optus stock was worth more than $A5 then. It has been in steady decline since.