Market slump follows Telstra's punt on sassy Cyberworks

By GILES PARKINSON

Sydney view

Was that Ziggy Switkowski with a smile this week or was he just gritting his teeth? The Telstra chief executive had every reason to be happy after striking the biggest cross-border transaction by an Australian corporate, but by the end of the week the market was looking for reasons to be miserable.

On Wednesday, Telstra revealed the reason behind Switkowski's apparent sudden fascination with the Hong Kong Sevens.

All along, he and a battalion of senior executives and advisers had been negotiating a $A6.5 billion investment in the fastest-growing company in the world, Pacific Century Cyberworks.

It looks like a great idea. Cyberworks is the brainchild of Richard Li, the 30-something wunderkind of Hong Kong magnate Li Ka-shing.

It was created only a year or so ago, still has no revenue to speak of, yet is trying to complete the audacious $US38 billion purchase of Cable & Wireless HKT, which it snapped up right under the nose of Singapore Telecom and Rupert Murdoch.

What it offers Telstra is an avenue for growth in Asia. Telstra has little room to expand, in Australia, as both its near-monopoly grip on the local call market and its half-share of the mobile phone market are under siege from smaller and nimbler rivals like the Telecom NZ-owned AAPT.

Asia, on the other hand, seems to offer boundless opportunities, both in the mobile phone and the internet markets. Cyberworks, through the contacts of Li senior and Li junior, is also presumed to have an entry card into mainland China, the El Dorado of the telecoms industry.

So what could possibly go wrong? Firstly, there's the Nasdaq-inspired correction (or crash or bear market if you will) that is threatening to destroy the internet currency that so many of these deals are based on. This deal won't go ahead unless Cyberworks completes the purchase of C&W HKT.

Every slump in its share price makes it that much more difficult, and explains why so many ambitious tech stocks are queuing at the door of Telstra's head of convergence, Ted Pretty. Because the federal Government cannot by law have its 50.1 per cent stake diluted, Pretty can't do a scrip-based deal and has only cash to play with.

The second big risk is the lack of detail in the deal. It seems as if it was put together in a bit of a hurry. After all, said a Telstra spokeswoman, it is only an MOU, and sensitive matters such as the share structure and the management of the two newly created joint-venture companies have not been discussed.

It means that the $6.5 billion investment is something of a punt. Telstra is better placed than the proverbial lift boy to make these decisions, and the odds do look pretty good. But a bet is a bet.

That is why by week's end, Switkowski may have readopted his slightly nervous posture. He has had a rough couple of months, beginning with the criticism labelled at the company when it announced record profits and a 10,000 job cut on the same day, and continuing through his hamfisted attempts at winning support in Canberra for a full sale of Telstra shares.

Switkowski has finally come up with a strategic plan to grow the company, but is yet to win the confidence of the markets. Even established ratings agencies Moodys and Standard & Poors are threatening to downgrade its debt ratings.

In the meantime, everyone will be concentrating on the share price. Friday night's plunge on the Nasdaq and Wall Street do not bode well.

As it is, both the Telstra fully paid shares and the instalment receipts sold in the $A16 billion secondary offering last November are barely trading above their issue price. Having missed out on the recent Nasdaq frenzy, it will be interesting to see how they cope with a bear market.

* Giles Parkinson is deputy editor of the Australian Financial Review.