telstra, kaz deal applauded

Telstra, Kaz deal applauded
By Robert Clow
April 6, 2004

TELSTRA'S proposed $400 million acquisition of technology services outfit Kaz Group won tentative support from investors yesterday as both parties confirmed takeover talks.

Responding to a report in The Australian yesterday, Telstra told the Australian Stock Exchange it "has been in discussion with Kaz". "No decision to proceed with any transaction has been taken," it said.

Kaz's stock was frozen at its pre-open price of 35.5c, while Telstra fell 2c to $4.50.

Analysts said the combination could make sense.

"We thought Telstra would look at that space," Macquarie Bank's Tim Smart said. "It is not necessarily a silly move from a strategic point of view."

He said Telstra's telecom business had been converging with Kaz's IT services business.

Telstra has been losing revenue in its business and government division, where Kaz would probably be housed, due to intense competition from companies such as SingTel's Optus, Uecomm and Telecom New Zealand.

For Kaz, Telstra offers the advantage of a far larger balance sheet.

"If you are a client looking to tender a $50 million to $100 million deal, the bigger the balance sheet the better," Macquarie analyst Alex Milton said.

He said Kaz had recently benefited from a trend to "select outsourcing", where governments have broken up massive deals into far smaller parts.

Already this year Kaz has won an $11 million contract with the West Australian Department of Commercial Development, a $4 million contract with the NSW Department of Mineral Resources and a $20 million federal contract with the Department of Defence.

But Mr Milton said nearly every technology company would like a larger balance sheet.

He said that discussions between the two companies were taking place as the business cycle appeared to be turning back in the services sector's favour. "Conditions have pretty much bottomed out," he said. "Corporations have called an end to the freeze in IT spending."

Analysts were unwilling to speculate on price, but one said the 37 per cent premium implied by a mooted $400 million price seemed steep.

Certainly, the dip in Telstra's share price yesterday suggested some scepticism.

Telstra's managing director in charge of corporate development, John Allerton, is understood to have been trawling for acquisition candidates in services and smaller internet service providers since the telecom company announced its results last year.

The Australian