Australia's Telstra signals acquisitions in Asia

Australia's Telstra signals acquisitions in Asia

Graham Morgan, Dow Jones, Sydney

Telstra Corp. signaled Monday further acquisitions over the coming 12 months in Asia, and with enviable free cash flows and recent sharp reductions in recurring capital expenditure Singapore's MobileOne Pte. Ltd. and Indonesian Satellite Corp., or Indosat, are at the center of its radar.

Australia's dominant telecommunications company, which is 50.1 percent owned by the government, needs to expand into Asia to offset declining growth in its traditional domestic fixed-line services and local mobile operations.

Telstra is aiming to double cash flows from Asia to about 18 percent within the next few years. Most of this is set to come from Internet infrastructure company Reach, an equal joint venture with Pacific Century Cyberworks Ltd.(PCW), and from Telstra's wholly owned Regional Wireless Co., the company that holds Hong Kong mobile company CSL Ltd.

In the company's annual report to shareholders, Chief Executive Ziggy Switkowski and Chairman Bob Mansfield said Telstra's main focus over the coming 12 months will be on service performance and customer satisfaction of services across Australia, and the extension of its operations in Asia.

"We are expanding our presence in the Asia-Pacific region, with a current focus on opportunities in wireless, data and Internet," Telstra told shareholders.

"Cash gives us options, choice and flexibility. Our positive cash position supports our balance sheet settings, reinvestment in our core network, investing in broadband and wireless data growth, and reduction in our gross debt," Telstra said.

During fiscal 2001-02, Telstra's free cash flow grew 36 percent to A$3.84 billion, excluding its joint ventures with Richard Li's PCCW.

In June, Telstra bought out PCCW's 40 percent stake in Hong Kong mobile operator CSL for US$475 million and now wholly owns the company.

The Australian company still has an equal joint venture with PCCW called Reach, a pan-Asian Internet infrastructure company.

Industry sources say Telstra expressed an interest in Singapore's second-largest mobile telephone company MobileOne earlier this year, but negotiations were shelved when the companies couldn't agree on price.

Analysts think Telstra is still interested in MobileOne, the main competitor to Singapore Telecommunications Ltd. in its home market.

SingTel owns Optus, which is Telstra's closest rival in Australia.

Furthermore, Telstra has made inquiries about the Indonesian government's sale of Indosat, which one Telstra employee said is "standard company practice when a sale comes up."

Telstra hasn't confirmed or denied that it has made inquiries into either MobileOne or Indosat.

The Indonesian government has a 56.9 percent stake in Indosat and a selldown will help it narrow a budget deficit, which is expected to be about 2.5 percent of gross domestic product this year.

Unlike MobileOne, Indosat will be partially sold, and is only likely to interest Telstra if it could eventually wrest control of the company.

Although Telstra is acquisitive, Switkowski will keep a tight rein on capital expenditure, which fell to A$3.6 billion last year from A$4.4 billion in fiscal 2000-01.

"Telstra will continue to drive service performance and customer satisfaction to higher levels across the nation; capital spending will remain disciplined; cash flows will continue to be strong; and broadband uptake will accelerate across all our platforms," Switkowski and Mansfield said in the annual report.

MobileOne, which analysts estimate is worth $1.2 billion, is well inside Telstra's spending budget, as is Indosat.

Telstra's annual sales were A$20.2 billion during 2001-02, up 8.1 percent from A$18.68 billion in the previous year, but sales from its traditional services are slowing making it more reliant on newer services, like data, for growth.

Its traditional telephone services account for roughly 39 percent of sales, when just five years ago they were 59 percent of the total.

"While these businesses have a low growth trajectory, they are the foundation of our solid and reliable cash flow, and economic returns can be continuously improved as costs are reduced," Telstra told shareholders.

Mobile telephony generated A$3.2 billion in sales in 2001-02, up 10 percent on year, but the rate of growth is slowing in this division too. Telstra has 5.9 million mobile customers, or roughly 45 percent of the market segment in Australia.

Elsewhere, two key issues facing Telstra are the government's selldown of its 50.1 percent stake in the company, known locally as T3, which is earmarked for the second half of 2003, and the pay television merger of Foxtel with rival Optus Television.

In typical fashion, Telstra executives didn't comment on the pending government sale in the annual report but did say they remain confident the Australian Competition and Consumer Commission will approve the merger.

The ACCC has already blocked the first Foxtel-Optus pay TV merger proposal on the grounds that the joining of the two largest pay TV operators in metropolitan areas was anticompetitive.

Last week, it concluded a public inquiry into the second proposal, but a spokeswoman said the regulator is unlikely to state its position this week because it needs more time to collate data collected from other industry participants.

Foxtel is half-owned by Telstra. Its partners, each with a 25% stake, are Rupert Murdoch's News Corp. and Kerry Packer's Publishing & Broadcasting Ltd.

"On Foxtel, we are hoping to see a positive restructuring of the pay TV industry in Australia subject to regulatory approval," Telstra said.