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Message subject : Telstra slides

This message was posted by kit on August 25, 2000 :

MELBOURNE, Aug 25 - Telstra Corp Ltd's venture abroad to grab growth opportunities denied to it at home may eventually push the dominant Australian telco's shares to new highs, but the initial earnings impact has sent them tumbling. Telstra and Hong Kong-based Pacific Century Cyberworks announced details of a pan-Asian alliance on Thursday and with the details came the news that the deal would dilute Telstra's net profit until the year ended June 30 2006.

Telstra shares fell 24 cents or 3.5 percent to A$6.72 on Friday as analysts digested the deal's details, their lowest close since June and a long way short of their A$8.78 2000 high.

This added to Thursday's 2.7 percent fall as investors were unsure if the initial earnings dilution of the deal, which will cost Telstra US$3 billion and assets, would ultimately pay off.

"In the short term at least it is going to be earning and cashflow negative, so I guess the ball is in Telstra's court now to prove that they will make a good fist of these deals," said Nomura Australia equities strategist Eric Betts.

Telstra said in a presentation to analysts its net profit after tax was likely to be diluted by eleven percent in the year to June 30, 2002, the first full year of the alliance operations, with the impact declining until becoming immaterial in 2005/06.

Telstra is expected to report an eleven percent increase in net profit before abnormals to A$3.89 billion in the year to June 30 according to Barra Global Estimates, as cost cutting helps ease the impact of market share erosion in traditional products.

The earnings dilution comes at a time when Telstra's growth is already under pressure as competitors chip away at the former monopoly operator's market share.


The major concern is that Telstra paid too much for its 40 percent stake in a joint venture regional mobile company, which along with a 50:50 Internet Protocol network company, is a key plank of the deal.

"Everything I look at seems to suggest that they have paid over the top for the mobile assets," said a Sydney based analyst.

Telstra paid US$1.5 billion for a stake in the business which had earnings before interest, tax, depreciation and amortisation (EBITDA) of US$123 million in the year to March 31, 2000.

Still, analysts said the cost of the mobile joint venture appeared to be balanced by Telstra gaining a 50 percent stake in the network company when it did not contribute half the assets.

One thing no market watcher is questioning is that the 50.1 percent state-owned Telstra, once a monopoly operator, needed to break out of its home market where competitors are inevitably chipping away at its market share.

"They do need to move into a faster growing market and this is a possible way of doing that, but there are risks associated with that and most of the risk now relates to execution of those strategies," said an investor at a major funds management group.

The uncertainty over whether Telstra can deliver a strong enough return on its investment does not come at a good time.

Many retail investors are in the process of deciding whether or not they will make a second payment -- A$2.90 including a loyalty discount of 15 cents -- on their partly paid shares, known as instalment receipts, or sell out.

The government sold an additional 16.6 percent of Telstra to the public last year with the payment due in two tranches. Those holding the receipts, which are trading below their A$4.50 issue price, on the 20 October must make the final payment.

Analysts said the PCCW announcement gave investors who were uncertain on whether to retain their shares a reason to sell, exacerbating PCCW announcement's impact on Telstra shares.

Telstra instalment receipts fell 18 cents to A$3.73.

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