Telco line leaves analysts on hold

By Richard Braddell

Will it, won't it? Will it float Xtra, sell down Southern Cross, or merge its cellular business with that of its new subsidiary, 80 per cent-owned AAPT?

These, and other similar questions, were raised but not answered when Telecom presented its uninspiring $209 million September quarter profit last week.

For the moment, Telecom is biding its time, seemingly intent on what was viewed as a low-key announcement aimed at ruffling as few feathers as possible in the lead-up to the election.

There can be no doubt that its $1.56 billion foray into Australia's third largest telephone company has changed the company's outlook. From an earnings focused, high dividend company, Telecom now has to sell the message that it is a growth story whose shares should be valued on future performance.

With rapidly expanding AAPT consolidated into the books, there can be no doubt that Telecom's revenue will soar. But that growth will come at the cost of higher capital spending and interest costs. No problem if, as Telecom suggests, AAPT raises its own capital through an equity raising on the New York's Nasdaq, thus diluting Telecom's own holding along the way.

Things look rosy. Well before the three or four years AAPT needs to position itself are up, Telecom's Southern Cross trans-Pacific cable investment should be delivering solid profits straight to the bottom line. When everything comes together, Telecom could be delivering earnings growth to rival its best.

Meanwhile, AAPT's entrepreneurship could drive back into the parent, possibly through mergers of some operations: the CDMA cellular networks, perhaps, or the expansion of Xtra's foot traffic by merging it with AAPT's smaller internet business to create a strong regional contender.

We will have to wait to see if the promise of a return to earnings growth to rival the good old days plays out.

There are those who worry about the execution risk. Not just the ratings agencies who have put Telecom on credit watch out of discomfort at debt taken on for AAPT, but analysts and the sharemarket who have discounted the stock out of fear that the grand plan could go awry.

It's not just AAPT that is giving rise to concern. "There are a tremendous amount of things it needs to get right at home as well as with AAPT," says one analyst who complains that Telecom has inadequately articulated how it will make the transition to a data-based, online company.

Yes, data and cellular grew faster than expected in the last quarter, but data has a long way to go. And the market is still neutral about the appointment of new chief executive Theresa Gattung. All the more so when the commitment of Jeff White, the respected chief financial officer she beat to the top job, is in doubt.