SingTel – BT

Cancelled Optus deal a blow to SingTel

EARLY last week, newspapers here carried small reports on a cancelled project of Optus, the Australian unit of Singapore Telecommunications.

They said that as a result of the Australian government termination, the A$16 million (S$xx million) which Optus had already spent on the A$1.9 billion broadband network, would be written off, with negligible impact on SingTel for the year ended March 31.

In Australia, the news made much bigger headlines mainly because the cancelled project was seen as a casualty of the changes in the country’s political landscape. What the Rudd government did was to axe a A$958 million funding agreement signed by its predecessor last September with Opel Networks, 50 per cent owned by Optus. The project was aimed at building a faster broadband network for almost 900,000 underserved households in rural and remote areas.

Optus, Australia’s second largest telco, had worked on the project some two years now. It submitted a bid in August 2006 and was declared winner of the tender in June last year in a bitterly fought contest against Telstra, the country’s biggest telco.

Telstra, in fact, continued the battle even after the tender was awarded, making legal challenges. It only recently ended its court attempt to access official documents through which it said it hoped to show how the former government had awarded Opel the contract. Telstra had also argued that the project would have overlapped with its existing network.

Communications Minister Stephen Conroy, when he was in the Opposition, had been vehemently against the project. He said that the decision to cancel was based on the Department of Communications’s assessment that Opel would not achieve coverage requirements.

Optus has naturally protested that the coverage requirements in the contract would be met and has offered to have an independent party audit Opel’s coverage. It also said that three successive attempts to meet the Department Secretary were ignored.

The Sydney Morning Herald said that some 100 staff had been working on the project for two years and Optus was to have funded the bulk of about A$900 million needed to set up Opel.

A furious Paul O’Sullivan, chief executive of Optus, said that the two companies had invested significant resources in the project and it was simply unacceptable to have the contract terminated in this fashion.

He said that the decision would dent confidence about future tender processes. He also reportedly said that Optus would be seeking detailed assurances from the government before participating in the upcoming A$8 billion national broadband network before it could commit to bidding for the right to build it.

The rural broadband network could potentially have given Optus a shot at attracting 900,000 more customers. In addition, it could have earned revenue from the new network by wholesaling to other operators at prices 30 per cent lower than existing levels.

While there are no projections of how much Optus could have earned from the project, it is likely to have been significant. For many quarters now, Optus has been struggling to increase revenue and profit in a very competitive market. For the third quarter ended Dec 31, 2007, it posted an increase in operating revenue of 3.6 per cent to A$2 billion.

While the write-offs from the cancellation of the project is negligible for the group, which posted operating revenue of A$10 billion for the past three quarters, that does not include the time and energy expended over the last two years. That must have been considerable, and now there’s nothing to show for it.

Optus did say that it is considering all options but it is really not feasible to fight the government, at least not without spending more precious time and money.

The latest development Down Under is a big blow to SingTel which paid S$13 billion for Optus in 2001. Optus makes up about two-thirds of SingTel’s revenue and one-third of its profit.

Winning the tender last year had been regarded as something of a coup as Optus has constantly had to fight Telstra every step of the way – not just in landing the bid – but in trying to retain market share. A JP Morgan note said that the termination is a setback for the group as the deal would have otherwise strengthened Optus against Telstra.

Still, the market seems to have shrugged off the termination. SingTel’s stock price ended Friday at $3.95, a level it has been trading at for the last two weeks. Perhaps, it is now hoping that SingTel would instead be more inclined to deliver a bigger dividend to shareholders.

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