Telecom's 9.9pc gives it power over Optus

By Richard Braddell

Having spurned on at least three occasions the chance to own part of AAPT, Australia's third largest telecommunications carrier, Telecom's surprise raid last week puts it in a position where it will have to be consulted on what could turn out to be a far-reaching shakeout in the Australian telecommunications market.

At worst, Telecom's 9.9 per cent stake will block rival bidder Cable & Wireless Optus from assuming full control.

Furthermore, AAPT is hardly disguising that it is far happier with Telecom on the register than it is with Optus.

"In becoming a major shareholder, Telecom New Zealand recognises the value of AAPT's customer base, infrastructure and technology," the chief executive officer, Larry Williams, said yesterday.

Nevertheless, Telecom's 70Ac higher $A5.70 a share bid is still short of the $A6 to $A7 a share independent valuation obtained by AAPT, although it is getting into the territory where Mr Williams can still be pleased with a bidder with much less incentive to tear the company apart and subsume it into a larger operation.

Failing another Telecom swoop this week, the next step may come from Australia's competition watchdog, the ACCC, which has gained an undertaking from Cable & Wireless Optus not to proceed with its bid for full control before early next week.

In theory, even under Australia's much less accommodating competition thresholds, a merger between Optus, at number two, and AAPT, at number three, should not be a problem.

But the ACCC has signalled concerns about the Optus bid, perhaps, because as Australian analysts have noted, a merger of the two would be a marriage made in heaven.

AAPT's investments in wireless distribution and in Australia's regions would sit nicely beside the fortune Optus blew to build a voice, data and video-capable HFC cable network in the cities.

Furthermore, AAPT is now an important player having, in the last year or two, dropped all vestiges of the telecommunications reseller it was when it entered the market as a subsidiary of the Australian Associated Press in 1990.

In the early years, MCI Communications, and New Zealand's Todd Corporation took stakes of 33 per cent and 24.5 per cent respectively, followed by Singapore Telecom, with 24.5 per cent, in 1995.

MCI was the first to drop out in 1994, while Todd scaled back in last year's float, before dropping out completely shortly before SingTel early this year.

The company now has three major shareholders, AAP Communications Holdings, Cable & Wireless Optus, with 10.56 per cent and Telecom, with 9.9 per cent.

The deregulation of the Australian telecommunications market in 1997 has served AAPT well. Hitherto forced into making a dollar through reselling arrangements with other licensed carriers, AAPT was able to enter many new markets on its own account.

The fledgling wasted no time establishing itself in the data market, in 1997 winning the contract to build and operate a massive managed data network for the Victorian state Government.

AAPT is arguably second largest in frame relay in Australia, while in calendar 1998 customer numbers doubled to 580,000. The company is the third largest Internet service provider and, in the last six months of calendar 1998, reached an important milestone, for the first time turning a bottom-line profit of $A16.2 million on revenue of $A374 million.

But the thing that has caught the analysts' attention is its investment in LMDS, a short-range wireless delivery system which AAPT plans to use to connect business customers in the cities and regions.

After paying $A66 million for the spectrum in February this year, AAPT has earmarked a further $A250 million spend to complete its LMDS network.

AAPT also paid $A11 million for spectrum suitable for CDMA third generation cellular services, although it would not have coverage in the important Sydney and Melbourne markets.

In theory, the synergies derived from a merger should mean Optus can afford to pay more than Telecom. But the latter, while obviously less keen for total control, has an obvious interest in maintaining its relationship with AAPT. The latter channels a reasonable amount of Telecom's international traffic to Australia.

But the reason Telecom is most interested is undoubtedly the fact that AAPT is a smaller player with demonstrated capacity to grow rapidly in a large, fast-growing market.

While Optus is this week pre-occupied at the ACCC, a swoop on more shares cannot be ruled out.