30/09/2010 - 00:00

Alinta fate awaits Telstra as NBN looms

30/09/2010 - 00:00

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The protracted sell-off of Alinta may be a glimpse into the future for Telstra.

Alinta today, Telstra tomorrow? This is a question that investors seem to be asking as they watch one former government business effectively disappear in a deal with its creditors, and another struggle to survive.

While there are big differences between Alinta, a gas and electricity distribution business, and Telstra, a telecommunications company, there are common threads that include:

• High debt levels.

• Falling market share.

• Limited understanding of customer service

• Government interference in pricing.

• Poor management decisions.

• No vision for the future.

Wrap those factors into a bundle and you understand why Alinta has been forced to hand over the bulk of its assets to a syndicate of lenders, presumably at a bargain-basement price, to avoid the ignominy of a total collapse into administration, and forced asset sales.

Of all its problems the biggest at Alinta is undoubtedly excess debt incurred by management, which believed it could grow fast enough to service the interest payments – a classic boom-time mistake that failed miserably.

What Alinta and its bankers did not understand is that government was never going to permit wholesale price increases of gas and electricity that would have hurt consumers in the name of servicing $2.8 billion in debt.

Telstra is carrying an even bigger debt burden than Alinta. It stands at close to $15 billion, and is being serviced comfortably, at the moment.

But, like Alinta, Telstra is losing market share. It is effectively a shrinking business that saw revenue drop by 2.2 per cent last year, and with more shrinking to come thanks to government actions, especially with the building of the National Broadband Network.

The latest financial results from Telstra provide a sobering glimpse into its future, a reason for the company’s share price decline over the past three months, which was actually nothing more than the continuation of a share price slide which started 11 years ago.

Back in 1999 Telstra was trading close to $9 a share. Its most recent price of around $2.70 represents a 70 per cent collapse.

Some investors see a share price slide by a big company such as Telstra as a reason to buy. Surely, goes the logic, it can’t keep falling, it’s such a big company valued on the market at $33 billion.

Other wiser investors point out that the government that spawned Telstra is now launching a $43 billion rival called NBN. Exactly how the new player will work, or precisely what it will sell remains a mystery, though there is no doubt that Australia is heading into a period of ‘telco glut’ – too much service for too few customers.

Telstra and the NBN today are such a ghastly combination of politics, business and legacy assets such as copper wires littering the suburbs and outback that no one can safely predict what the final shape of the two telecommunications carriers will be, except for these facts:

• The government owns the NBN, just as it used to own Telstra.

• The government makes the rules when it comes to who uses which telco services.

• It is in the government’s political interest to make the NBN a success, at whatever price.

And, if that price is the destruction of Telstra, or its re-acquisition via a deal similar to that we’re watching today between Alinta and its bankers, then so be it.

Still thinking of buying into the Telstra story? Why not try catching a falling knife instead, that way you only lose your fingers.

Something in the air

It’s a different story at Iron Ore Holdings, another company that suffered a big sell-off earlier this year, but now seems to be in revival mode thanks to a potential deal with China’s Baosteel.

Between early March and late July IOH’s share price plunged 51.5 per cent from $2.60 to $1.26 thanks to the failure to reach an agreement with Rio Tinto to haul iron ore from IOH’s high-quality Iron Valley Project in the central Pilbara.

When first announced the Rio/IOH tie up looked like the sort of pact which could break the logjam of small miners trying to get rail access. Investors were particularly excited because the biggest shareholder in IOH, media and tractor billionaire Kerry Stokes sits alongside Rio Tinto’s chief executive-in-waiting Sam Walsh on the board of WA Newspapers.

Cosy as the Stokes/Walsh arrangement might be, it failed to result in a rail haulage deal and might have played a part in IOH managing director Matt Rimes leaving the company early last month, shortly after the period of exclusive negotiations with Rio came to an end.

Enter Baosteel, maybe. Over the past few weeks IOH’s share price has been marching steadily higher, adding 25c (18 per cent) over the past four weeks.

What might interest Baosteel is the high-grade nature of IOH’s 240 million tonnes of iron ore outlined at Iron Valley, with more certain to come as assays flow in from recent drilling.

If not Baosteel there are other prospective partners not far away, including Fortescue Metals a northern neighbour – which is why the market can smell a fresh deal for IOH.

Super nanny

While on the subject of the stock market it was curious to see that Wesfarmers is refusing to provide a copy of its share register to low-ball share raider David Tweed with the reason being that he has a “chequered history”.

There is not much nice to say about the way Tweed goes about his work, directly contacting shareholders in a company and offering an immediate cash purchase at a price well below the market price.

But, since when has a public company had the right to refuse access to its share register, and why does Wesfarmers believe it has a duty to protect shareholders from themselves. If people are so stupid as to accept Tweed’s cut-price offer that’s their problem.

As for saying Tweed has a chequered history, so what. Using that as an excuse to not produce a list of shareholders is one step towards turning a public company into a secret society, or an extension of “nanny government” into the private sector.

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“The man who works and is not bored is never old.”

Pablo Casals

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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