TLS - is that a hammer in its pocket ?, page-2

Well that was yesterday, and here is a good synopsis of why the TLS share price is heading south from Chanticleer in todays AFR.

Telstra caught in a quandary
Apr 30
John Durie


Ziggy Switkowski and his team at Telstra appear to be living in a dream, expecting to be privatised, playing the regulatory game to its limits, exploiting its monopoly power in earning $10 million in free cash flow per day and earning 8.5 per cent in excess returns without any regulatory backlash.

Its apoplectic reaction to last week's moves by Communications Minister Richard Alston on one score reflects this apparent naivety, but in reality is one more example of Switkowski's almost impossible task of serving and satisfying three masters: the market, the Government and the customers.

Granted Alston could have helped his cause with a more detailed response to the Productivity Commission report on Telstra, which would have reduced the confusion. The market was left, with Telstra's help, to read in the worst possible outcome.

But Switkowski runs a company with more than 90 per cent of the local phone market, 47 per cent of the mobile-phone market and 80 per cent of the corporate data market, which he has running superbly, exploiting Telstra's dominance to the limits.

In Federal Cabinet's view, amid a prolonged bear market in global telecommunications services, the argument for increased regulatory overview was a relatively simple decision.

As overstretched phone companies around the world sink into the holes they dug with their own irrational exuberance in recent years, Telstra, on CSFB figures, earns returns of about 16 to 17 per cent or 8.5 per cent above its 9.5 per cent cost of capital.

Switkowski has talked to Alston at least twice since last week's bombshell that restricts Telstra's ability to take ACCC decisions to appeal, extends the scope of the ACCC in regulating the phone company and formalises what the company already does in issuing separate accounts for its wholesale and retail divisions.

The first phone call was described as a bit flippant. The second was more urgent and of a more table-thumping nature.

Telstra's fears are reflected in threats being passed on to the Government and the market that ironically came on the same day, yesterday, that Telstra handed Treasurer Peter Costello a cheque for $709.1 million as part of its record $1.4 billion interim dividend.

The threats include pulling the present $500 million domestic bond issue on the grounds Telstra's position has materially changed in two key areas: its good working relationship with its majority shareholder (the Government) and increased regulatory scrutiny of its decisions.

Alston's office was unmoved, saying the full details of last week's disclosure would come when the Government was ready and noting the issues discussed had been workshopped ad nauseam around the local industry for 18 months or more.

Telstra has gone further to warn that directors cannot be expected to sign off on planned $3.5 billion in capital expenditure if rates of return are subject to revision by the ACCC.

If Alston was showing how tough he is to clear the path for a later full privatisation,Telstra's response is that it doesn't want to be privatised if that means it will be a regulated utility.

This response misses the point that by doing its job "too well", the incumbent monopoly was always going to have significant sections of its business as a regulated utility whether the Government owns 100 or nil per cent of the company.

This is why Switkowski was smart to push offshore, establishing a foothold in Asia that should be extended this year amid the consolidation of the Hong Kong mobile market and a hoped-for beachhead in mainland China.

Telstra executives, with their share options written in about the $6-a-share mark, will no doubt say what's the point when CSFB figures that if the Government cuts its "excess return" from 8.5 per cent to, say, 6 per cent, the stock valuation would reduce to $4.50 a share, and at 4 per cent the stock value would be more like $4 or $1 a share below yesterday's close.

It all depends on the final details of Alston's package; and if you wanted a worst-case scenario, then the best person to have rung yesterday was Ziggy Switkowski.

Conspiracy theories abound about how Telstra has long frustrated Peter Costello because he couldn't control its board and get dividends switched on and off as the Government's bank balance demanded and how chairman Bob Mansfield's mate John Howard had no idea Alston was about to move against the company.

All this from a company that until September last year had some 27 arbitrations pending, and a threatened appeal in the Primus-AAPT local-access case that delayed resolution for well over a year. Not surprisingly all these arbitrations were settled in recent weeks and the appeal threats were dropped as Switkowski cleaned house to advance his hoped-for softer regulatory regime, which he said was a chance this year.

Amid the horrors of the global industry, Telstra has managed to push through higher internet charges and some rationality in mobile pricing including chopping the handset subsidy - moves that were an impressive demonstration of its ability to manage its business but made it an easy target.

Sadly then for Switkowski, even if Alston left him out of the loop, he established the basis for the Government to wield its stick.

Assuming the Telstra horror picture is anything more than the usual gaming between Government and industry, if Switkowski thought the Government would go easy to boost its returns when the rest of Telstra was sold, he may have misread the politics as well as the stockmarket.

Granted no-one likes uncertainty, and last week's moves have done little for the stock price. But at the end of the day, the price depends more on the earnings news Switkowski will deliver later this week and a pick-up in telecommunications demands.

As an aside, with ACCC commissioner Rod Shogren's term ending last week, the new telecoms czar at the regulator will be Ross Jones, who runs its mergers department (Foxtel monopoly), airlines and media.

No-one could accuse Alston of being consistent given his apparent backing of the Foxtel monopoly, floating multi-channelling for free-to-air TV and a tough regulatory hand on Telstra. But the company has once again, unwittingly or no, forgotten that it is a dominant incumbent - as has the stockmarket.