Sydney view: Market sighs with relief at Telstra's revised alliance

By GILES PARKINSON

Telstra finally received a positive response from the sharemarket on Friday, after it revealed its long-awaited amendments to its multibillion-dollar alliance with Richard Li's Pacific Century CyberWorks.

The amendments saved Telstra $1 billion, but they were predictable, simply because the market conditions following the April tech-wreck demanded it.

Telstra's $US1.5 billion ($3.76 billion) investment in Pacific Century's convertible notes needed to be repriced to something approximating the market price of Pacific's shares. Telstra's investment in Pacific's mobile phone business had to be restructured for the same reasons.

Telstra had two choices - to walk away from the deal or demand a discount. Mr Li also had choices, but the only real option for survival was to beg Telstra for mercy.

The revised deal means Telstra will halve the cost of its investment in convertible notes, and get 50 per cent more of the mobile phone business for just $US180 million. It reduces the cost to Telstra per subscriber by 25 per cent and gives it a majority stake and management control.

The deal that should satisfy the market. What was surprising was that it took so long to occur. It is staggering to think the Telstra board had to wait until the market was screaming and the share price tumbling.

It was not just another marketing agreement - it was the biggest overseas investment ever made by an Australian firm.

And a precedent for stuff-ups had been set: the previous biggest transaction, BHP's purchase of Magma Copper, resulted in the loss of every dollar of the $3.1 billion investment.

The first tech-wreck occurred in April. That should have given someone in Telstra a clue that maybe the deal needed to be reviewed.

Telstra was planning to invest $5 billion in a firm some analysts thought could go belly-up. Yet the board rubber-stamped the original deal in August. What was it thinking?

Perhaps it was the lack of big-business experience. The board included a comedian, a couple of farmers, a lawyer, an accountant, a scientist, an oil executive and several professional directors.

A couple of weeks ago, the Australian Government went some way towards addressing that issue with the appointment of three of the country's most successful chief executives to the board - John Fletcher, Catherine Livingstone and Sam Chisolm.

The revised deal with Pacific is a crucial step towards chief executive Ziggy Switkowski's goal of achieving a further $50 billion to $100 billion in market capitalisation, something he says can be done only by growing overseas.

More importantly, it gives Mr Switkowski a greater chance of keeping his job into the next year. If the deal is as good as he says it is, it would be a pity if he was not around to hear the applause.

It was not so long ago that Coles Myer chief Dennis Eck could do no wrong, and the new head of Woolworths, Roger Corbett, was thought to be incapable of doing any right. Coles Myer was knocking on the doors of the top 10 companies in the country, and Woolworths' share price was languishing amid widespread grief over the demise of Reg Clairs.

How times change. Last week, for the first time, Woolworths' market capitalisation overtook that of Coles Myer, which has now fallen out of the ranks of the top 20.

Mr Eck's crime? While Mr Corbett has delivered steady profit growth and a special dividend to shareholders, Mr Eck has been hamstrung by variable performances in his varied discount chains and a decision to suspend the shareholder discount card.

Coles Myer has the largest shareholder base - 565,000 - outside Telstra and the recently privatised financial services groups, and most of these are eligible for the shareholder discount card.

The card is good for shareholders but is costing the company a lot of money. Winding back privileges will be particularly sensitive, which may explain why Coles decided to delay announcing plans for its $525 million in franking credits.