commentary Australia's third-largest telecommunications company, AAPT, has been left at the altar so many times that there is understandable scepticism that it will tie the knot in 2009.
Insiders say Broad's focus on the main game was distracted by various problems, including the start-up of a new customer management platform called Hyperbaric
The Telecom New Zealand subsidiary is said to be on the auction block again, with Goldman Sachs JBWere advising the TNZ board.
Two failed attempts to sell the business in 2006 prompted TNZ to do a back-flip and bulk up the business. It invested $357 million in wholesale broadband provider PowerTel in May 2007.
TNZ said at the time that it took "courage and a lot of forward thinking" to do the PowerTel deal which was designed to bring together "state-of-the-art network infrastructure" with AAPT's retail customer base.
Former PowerTel chief executive Paul Broad was appointed to run AAPT with the job of migrating retail customers on to the PowerTel network and extracting as many economies of scale as possible.
However, insiders say Broad's focus on the main game was distracted by various problems, including the start-up of a new customer management platform called Hyperbaric.
The latest financial results for the six months to December showed a deterioration in AAPT's business. Revenue and earnings fell, guidance for 2013 earnings were cut and $68 million in goodwill from the PowerTel deal was written off.
Fixed line customers shrank 6 per cent in the quarter and consumer broadband customers fell 8 per cent. TNZ said AAPT's earnings in 2013 would be at the lower end of the $150 million to $200 million range. Many analysts believe AAPT will be pushed to earn more than $100 million in 2013.
Analysts at ABN Amro say the latest AAPT results were not as bad as they first appeared. Costs were being cut at the rate of $2 million to $3 million a month and earnings in the second quarter were up 38 per cent on the first quarter.
But the broker says the key issue was the slow migration from off-net revenue to on-net revenue: "At 31.4 per cent of revenue, resale (including mobile) is at its lowest share for the past two years and the decline seems to be accelerating. Against that, the bulk of this revenue has not migrated on net, as calling revenue has declined and data and broadband are flat second quarter 2009 on second quarter 2008."
ABN Amro says that with capital expenditure at less than 11 per cent of sales, AAPT is not investing enough to make the on-net strategy work.
Capital spending priorities are far greater back at home in New Zealand at a time when the TNZ balance sheet is stretched. Rating agency Moody's has threatened to cut its A2 rating on TNZ's $2.4 billion in bonds.
Analysts at Macquarie Research Equities say the obvious way for TNZ to solve its capital problems is to either sell AAPT or cut its dividend. But they say that given the weak macroeconomics environment, AAPT would likely only attract a very conservative price of $300 million to $400 million, or 3.3 to 3.4 times fiscal 2010 earnings before interest, tax, depreciation and amortisation.
A sale would be mildly accretive to TNZ's earnings in the short term but Macquarie says it would be giving up medium-term growth because AAPT is forecast by the company to increase earnings by 23 per cent a year for the next four years.
Analysts at Southern Cross Equities reckon the obvious strategic partner for AAPT would be VHA, the business created from the merger of Hutchison Telecommunications (HTA) and Vodafone Australia.
"AAPT is a significant backhaul supplier to both HTA and Vodafone and synergies would exist from a merger," the broker says.
While the merger of AAPT with VHA makes strategic sense, there are many obstacles to a deal going ahead. VHA faces huge integration issues as well as the challenge of disentangling itself from network sharing agreements with Optus and Telstra. There is also the funding problem.
There are no other obvious buyers of AAPT, so the prospects for third time lucky on the marriage front are pretty slim.
This article by Business Spectator's Tony Boyd is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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