This will be a big year for Theresa Gattung, Telecom's chief executive officer. Her position is under serious threat unless the company's performance improves substantially.
There is a strong argument the board should already have replaced Gattung. Since she became CEO on October 1, 1999, the company's share price has fallen
from $7.72 to $4.69, net earnings before abnormal items have declined from $816 million to $670 million and the dividend has been slashed from 46c to 20c.
The group's strategy is confusing and its communications to non-institutional shareholders is poor. In a letter to the Business Herald (January 2) Gattung stated that Telecom had always articulated its Australian business strategy clearly and openly. She then described this strategy as: "With AAPT it is to recognise its attacker status and focus investment on selected long-term opportunities. With our other Australian business, TCNZA, it is to offer customers the benefits of our unique transtasman footprint."
Gattung urgently needs experienced and top-class communications advice.
Telecom's overall performance has been extremely poor and on our star rating system Gattung scores a dismal five out of a possible 15 stars.
There are two arguments in defence of Telecom's chief executive: telcos around the world are struggling and Gattung inherited most of her problems.
Telecommunication companies are performing poorly mainly because they expanded too rapidly during the Nasdaq technology boom. But to exonerate Telecom because it made the same mistakes as its peer group is no comfort to the company's 57,500 shareholders, particularly when many bought their holdings from Ameritech at $8.85 a share.
Telecom's poor share price performance can largely be attributed to its purchase of AAPT in Australia. In mid-1999 it bought 19.9 per cent of the small Australian telco. In September it made a full takeover offer for AAPT and ended up with 80 per cent at a cost of $1.57 billion. The purchase was totally funded by debt.
The board at the time of the AAPT offer was Peter Shirtcliffe (chairman), Dr Roderick Deane, John King, Patsy Reddy, Michael Tyler and Paul Baines.
In the middle of the offer, on October 1, Gattung replaced Deane as chief executive and Deane was appointed chairman.
At the end of 2000 Telecom bought out AAPT's minority shareholders. AAPT's carrying value was $2.8 billion, including post-acquisition investments, representing nearly one-third of Telecom's total assets.
Who is to blame for AAPT's poor performance and the high price paid for the acquisition? The chief executive is ultimately responsible for a company's performance and communication of its strategy to investors. In these areas Gattung has not performed well.
But Deane and the rest of the board must also take some blame. Deane strongly advocated an Australian growth strategy but his plans were rejected when Bell Atlantic and Ameritech representatives dominated the board. Shortly after they resigned Telecom bought its first AAPT holding.
No one has been held accountable for the acquisition, yet all board members at the time, other than Shirtcliffe, are still there.
Gattung's performance will be in the spotlight this year and she should be under much pressure to resign if AAPT's financial returns do not improve. The same pressure will apply to other long-standing board members, including Deane.
Auckland International Airport
Indications are that John Banks did Auckland City ratepayers no favour by selling half of the council's Auckland International Airport shares at $4.90 each. On December 6 Auckland City Council said it had sold 38.9 million Airport shares, representing half its 25.6 per cent holding, at $4.90 a share. This realised $190.8 million, $21.6 million below the shares' current value.
The city also incurred costs of $5.7 million, reducing its net realisation to $185.1 million or $4.76 a share.
These costs included:
* $3.1 million paid to First NZ Capital for its lead manager role, brokerage, costs and disbursements.
* Insurance costs of $500,000.
* Legal fees of $1.6 million, including First NZ Capital's legal obligations.
* Other costs of $500,000.
These costs equate to 3 per cent of the final realisation, much higher than the 2 to 2.5 per cent estimate. The council argues they were high because only half the shareholding was sold. But the share sale raises several issues.
Why did the council pay First NZ Capital a brokerage fee of 1.3 per cent when it should have been able to get a lower rate from other brokers?
Why could First NZ Capital get only $4.90 a share when the market price before the sale was above this and purchasers paid no brokerage?
Did First NZ Capital exempt purchasers from paying brokerage because the rate it received from Auckland City was unusually high?
Why did First NZ Capital advise the council to sell its Airport holding when some brokers have picked the company as one of this year's best prospects?
Cedenco
Cedenco's performance has been impressive in recent years yet the company has almost totally dropped off investors' radar screens.
SK Foods, a leading Californian processor of bulk food ingredients, bought 54.8 per cent of Cedenco from Brierley Investments and Maori interests in May 2001. Early last year SK Foods bought Cerebos' 50 per cent interest in Cedenco Australia, making the operation a 50/50 joint venture between SK Foods and the listed New Zealand company.
As part of the arrangement, Cedenco Australia agreed to supply Cerebos with all its tomato paste, diced tomatoes and apple paste requirements for Australia and New Zealand.
The notice of meeting to approve the transaction predicted that Cedenco would achieve a net profit of $4.9 million for the September 2002 year. Actual earnings were $4.1 million, because Cedenco Australia contributed $1.5 million compared with a forecast of $2.6 million and a termination fee of $660,000 was paid to Dean Witters, the former chief executive and board member.
Cedenco Australia's disappointing result occurred because it could not convert record factory throughput into sales, resulting in an increase in inventory.
No dividend was paid because of the increase in inventory and capital expenditure, although the group is in a strong financial position, with shareholder funds representing 80 per cent of total assets.
At $2.00 Cedenco has a historical price/earnings ratio of 8 and is relatively cheap. It is also well positioned for long-term growth and has a strong balance sheet.
Nevertheless investors should take a cautious short-term approach because of the strong New Zealand dollar and potentially negative implications of the Australian drought.
* Disclosure of interest: Brian Gaynor is a Cedenco and Telecom shareholder.
* Email Brian Gaynor
This will be a big year for Theresa Gattung, Telecom's chief executive officer. Her position is under serious threat unless the company's performance improves substantially.
There is a strong argument the board should already have replaced Gattung. Since she became CEO on October 1, 1999, the company's share price has fallen
AdvertisementAdvertise with NZME.