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.

Optus deal loss bad for SingTel: JPMorgan

AN Australian government decision to cancel a broadband contract involving Singapore Telecommunications is a setback for the group as the deal would have strengthened it against rival Telstra, JPMorgan said in a client note.

Australia on Wednesday cancelled a A$958 million (S$1.2 billion) funding agreement with OPEL, a joint venture between SingTel’s Optus Australian mobile phone arm and Futuris Corp Ltd’s Elders business, as some conditions including prescribed coverage requirements had not been met.

‘The termination of the OPEL contract is a positive for Telstra and a negative for SingTel as the network build in regional areas would have created greater competition in markets where Telstra enjoys a competitive advantage due to a lack of competition,’ JPMorgan analysts said.

JPMorgan is keeping its ‘neutral’ rating for SingTel shares. Optus chief executive Paul O’Sullivan said on Wednesday that the government’s decision was ‘based on flawed data’, and ‘was bad news for rural and regional Australia and for competition in the telecommunications industry’. — Reuters

Termination of Optus JV rural broadband rollout

Australian government terminates funding for Opel

SingTel announced that the Australian government has terminated the A$958m funding agreement with Opel for the rollout of a broadband network serving rural parts of Australia. Opel is a 50/50 JV owned by SingTel subsidiary Optus Networks and Elders Telecommunications Networks. According to SingTel, the termination stemmed from the Australian government’s belief that Opel had failed to meet certain, unspecified conditions. Optus and Elders maintain that they have satisfied all the conditions.

SingTel will be taking a A$9m hit to its books for the capex it had incurred to date. This is in addition to the A$7m operating expenses related to the same project.

Comments

No material impact, marginally positive for cashflow. This does not have material impact on SingTel’s earnings, given that Optus has an earnings base of over A$500m. We see a mild positive from a cashflow perspective for 2009-2010 as termination of the project could potentially release around A$100m of cashflow over the period. Recall that the project involved an A$917m contribution from Opel to be matched by the government’s A$958m funding. Most of the A$917m contribution from Opel were in network and distribution assets, leaving only A$200m in actual cash outlay. As a 50/50 partnership, Optus was committed to providing A$100m cash to the project.

We had not factored in significant contribution from this project to Optus as we had questioned the profitability of the project. Hence, no change to our estimates.

Valuation and recommendation

Maintain Outperform with unchanged sum-of-the-parts target price of S$4.45. We continue to like SingTel for its liquid exposure to leading regional mobile operators, diversified earnings base and CY08 yield of over 4%.

Australia scraps US$871m broadband contract

SYDNEY – Australia’s government has cancelled a multi-million dollar deal with telco Optus and rural finance business Elders to build a broadband Internet network across the vast nation, the partners said on Wednesday.

Former prime minister John Howard announced the A$958 million (US$871 million) agreement last year, saying the Optus/Elders joint venture Opel would supply fast and affordable wireless broadband to hundreds of thousands of Australians living in remote areas.

But Optus, the Australian off-shoot of Singapore telco Singtel, and Elders’ parent company Futuris said that the new Labour government felt that the plan failed to meet coverage requirements and had cancelled the contract.

Optus and Elders dispute the assertion.

‘The Opel network is capable of meeting the objectives of the Broadband Connect Infrastructure Program and delivering improved broadband services to 889,322 underserved premises in rural and regional Australia within two years and at metro-comparable prices,’ Futuris said in a statement.

The government also said that the Opel network could duplicate a nationwide fibre-to-the-node (FTTN) broadband network proposed by newly elected Labour Prime Minister Kevin Rudd, the partners said.

Optus’ main rival, Australia’s largest telco company Telstra, welcomed the news as a ‘commonsense decision’.

‘The previous government’s decision was made as a result of poor process and delivered little for regional Australia,’ Telstra’s national group managing director Geoff Booth said in a statement.

The Howard government had planned for the OPpel network to deliver affordable broadband access to 99 per cent of Australia’s population of 21 million by 2009.

Labour has vowed to supply 98 per cent of homes with high-speed Internet services within the next five years and is hoping to attract proposals from a number of companies, including Telstra and SingTel, for the FTTN network. — AFP