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Reach the big challenge for Telstra
By Geoff Hiscock
SYDNEY, Australia (CNN) -- Australian telecom giant Telstra has identified its Reach joint venture with Hong Kong-based PCCW as a "significant challenge" in the year ahead. Telstra CEO Ziggy Switkowski told the annual general meeting on Friday that the Reach infrastructure joint venture operated in the "most troubled part" of the industry -- global connectivity and Internet bandwidth. Telstra and Richard Li's PCCW formed Reach as part of a wide-ranging alliance in 2000 that included the creation of Regional Wireless Company (RWC). This company, initially held 60 percent by Telstra and 40 percent by PCCW, owns the leading Hong Kong mobile operator CSL. Telstra moved to full ownership of RWC in July this year, paying PCCW $614 million for PCCW's share. Terms rewritten
Switkowski was criticized for over-paying when the alliance with Li was first unveiled in April 2000. The terms were rewritten in October that year and revised again before completion in February 2001. Switkowski said Friday that Telstra had made important investments in Asia, but the next step was to deliver the best possible returns from those investments. He said the Reach venture "represents a significant commercial challenge where the year ahead will be quite critical". Last December, Reach said it would pay a net $80 million for the Asian assets of undersea cable operator Level 3, including its Tiger cable linking Hong Kong, Taiwan, Japan and Korea, and a Japan-U.S. cable. Switkowski said earlier this year this deal would speed up Reach's entry into key markets in North Asia. But there is a glut of capacity on global communications networks, in part from over-ambitious rollouts by companies such as bankrupt Global Crossing and WorldCom. Earnings dropTelstra dominates the fixed-line, mobile and Internet markets in Australia, and has Asian expansion ambitions built in part on its alliance with Li's PCCW. In August Telstra reported a full-year earnings drop of almost 10 percent to Aust. $3.66 billion ($2 billion) for the year to June 30, and said sales would be close to flat in the year to June 2003. Switkowski repeated that outlook Friday, saying the near-term outlook for Telstra was continuing performance consistent with recent quarters. "Our trading results remain steady but flat," he said, noting Telstra could not avoid the impact of the drought in Australia, the slowing of the domestic housing market, and continued uncertainty in global markets, particularly in the United States. Telstra shares closed 0.44 percent lower at A$4.57 on Friday, on a day the broader market put on 1.44 percent. Telstra has fallen about 12 percent this year. Telstra chairman Bob Mansfield earlier told shareholders that the company clearly acknowledged its share price was well below its peak of A$9.20 seen in February 1999. But he said it was relatively a strong performance, when compared with the falls seen by the top telcos in the U.S. and Europe. Earlier this month, ratings agency Moody's Investors Service downgraded its outlook for Telstra from stable to negative because of diminished growth prospects.
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