Between the lines: Telecom hunts big game

Telecom's appetite for Australian acquisitions appears to be taking on binge proportions. Even before it has completed the takeout of the minority shareholders in AAPT, details of an even larger investment in the assets of Cable & Wireless Optus are surfacing, courtesy, apparently, of leaky Australian advisers and a well-informed Australian press.

But while it has become undeniable that Telecom is partnering Japan's NTT DoCoMo to buy Optus' mobile assets, details of how that will be achieved are less clear.

Credit ratings agency Standard & Poor's has already warned of the risk to Telecom's A+ credit rating should it embark on a major expansion without first injecting new equity into its balance sheet.

But with the prices of telco assets on the soft side, the lure of Optus' one-third of Australia's rapidly growing mobile market must be nearly irresistible.

It won't be cheap, but analysts think that Telecom could manage the purchase of 40 per cent of Optus' $A11 billion mobile business, based on the reported partnership with DoCoMo holding a further 20 per cent.

How it would be done is another matter. Most likely, a new company would be set up to hold the Optus mobile business along with AAPT, which is about to become 100 per cent owned by Telecom. At the price Telecom is paying to mop up the minorities, AAPT in total would be worth about $A2.2 billion.

But even if Telecom and DoCoMo can come up with the necessary cash, there remains the issue of how the 40 per cent balance will be paid for.

An obvious indicator is the willingness Optus' parent, Cable & Wireless, demonstrated in taking shares as well as cash when it sold its controlling shareholding in Hong Kong Telecom to Pacific Century Cyberworks.

That deal has had its moments, but the fact remains that most telco takeovers are completed with scrip, with cash payments a rarity.

The next step would be for Optus to dispose of its shareholding in a public offer.

The question remains about what Telecom would do with what it gets. A useful amount of AAPT's debt would be taken off its balance sheet, while a sizeable minority stake in a much larger regional alliance, perhaps including Singapore Telecom, would lift it into a new league.

Telecom would also get a GSM technology platform. While that is incompatible with the CDMA systems currently being commissioned by AAPT and Telecom, it would spread the technology risk and open possibilities for upgrading to the third generation W-CDMA favoured in Japan by DoCoMo.

It would also provide access to DoCoMo's highly successful iMode messaging system at a time WAP is looking somewhat of a cul-de-sac.

So much for the supposition. Cementing this deal will take months and there will be other players with a hungry eye, too.