Telstra Chief Quits Amid Asia M&A Missteps

SYDNEY (Dow Jones)--Under pressure to boost investor interest ahead of a A$30 billion share sale, Australia's largest telephone company Telstra Corp. (TLS) Wednesday hung up on chief executive Ziggy Switkowski, one of the architects of its failed expansion into Asia.

After a week of denials, the company's directors met in the morning then announced that Switkowski, who became chief executive in March 1999, has agreed to leave on July 1 2005 at the latest, two and a half years before his contract would have run out.

Ill with a virus, the Melbourne-based chief executive couldn't attend the Sydney board meeting and listened to the deliberations on his future by a telephone linkup.

Under the leadership of Switkowski - a nuclear physicist who segued into telecommunications after management training at Harvard Business School - Telstra spent over A$3 billion on an unsuccessful expansion into Asia and has steadily lost market share in its highly competitive home market. Its share price fell 42% during his tenure.

Earnings from CSL, Telstra's mobiles business in Hong Kong, have been under pressure amid stiff competition. A writedown of Reach, the loss-making undersea cable joint venture with Richard Li's PPCW Ltd. (PCW), Hong Kong's largest telephone operator, dented Telstra's net profit by A$1 billion in fiscal 2003.

Earlier this year bankers forgave some of Reach's US$1.2 billion of debts, with Telstra and Reach repaying just 26 cents for each US$1 owed.

McGauchie said Telstra isn't ruling out an internal candidate to replace Switkowski and is looking for a chief executive who will be committed to the company for a five year period.

Close to the Howard government as the former head of the nation's farm lobby group, McGauchie said legislation paving the way for the company's full privatization is likely to be passed by the end of 2005 with the actual sale of the shares taking place in 2006.

News of Switkowski's departure follows the resignation of Bob Mansfield as chairman in April after the board rejected a plan, supported by Switkowski, for the company to mount a takeover for John Fairfax Holdings Ltd. (FXJ.AU), a newspaper publisher with a market capitalization of A$3.9 billion.

Telstra watchers said the appointment of a new chief executive will do nothing in the short term to ameliorate the problems facing the company, including revenue growth below the industry average, intense competition in the mobiles market, and the decline of its core fixed line telephone business.

"The industry conditions are still the same," said a senior analyst, who didn't want to be named.

"They want a fresh face ahead of any proposed third tranche" of the privatization process, the analyst said.

After securing a majority in parliament's upper house in the Oct. 9 Federal election, the Liberal-National coalition led by conservative Prime Minister John Howard has said it will use this mandate to sell the remaining 51.8% stake in Telstra.

The share sale, expected in 2006, will raise about A$30 billion for the government.

Including the government's stake, Telstra is nation's biggest company by market capitalization, with a market value of A$63 billion, about A$5 billion ahead of mining giant BHP Billiton (BHP).

Full Sale Will Allow Expansion, Maybe Into Media

Without the encumbrance of government ownership, analysts say the company will have greater ability to raise equity and debt capital, allowing it to diversify its business with large acquisitions, such as in the media sector.

Chairman Donald McGauchie, however, played down the prospect of significant changes, telling a teleconference that "it is not our intention to change strategy dramatically."

The plan to return A$4.5 billion to shareholders over three years remains in place, he said, but refused to say if the company will still aim for annual revenue growth of 4% by fiscal 2006 or if it will have to cut costs by more than the targeted A$800 million to maintain profit margins.

Losing its monopoly position last decade, Telstra accounts for about 74% of local calls but has been steadily losing market share in recent years to smaller rivals and now has 46% of the mobiles market. Often through steep and costly discounting, its grip on the mobiles market has been challenged by Hutchison Telecommunications Australia Ltd. (HTA.), the Optus division of Singapore Telecommunications Ltd. (s12.sg) and Vodafone Plc (VOD).

Telstra's shares surrendered an early rally on news of Switkowski's resignation to close down 2 cents at A$4.91. The stock gained 21 cents over the previous six sessions as rumors of Switkowski's departure swirled around the market.

"There's been turbulent times during his (Switkowski's) reign. It's been a difficult time to be managing a telecommunications company," said Paul Xiradis, head of equities at Ausbil Dexia, a fund manager. "The market is of the view it is time for him to move on and bring in fresh blood."

The government in recent years has said A$5.25 represents "fair value" for Telstra, with analysts assuming this price again needs to be reached before the privatization process resumes.

Praising Switkowski for leading the company during a difficult period for telecommunications companies, McGauchie said the board will immediately begin a wide ranging search for a replacement.

"The board considers it very important to give the market, potential investors and staff as much certainty as possible regarding the leadership of the company through its expected full privatization and beyond," he said in a statement.

McGauchie said Telstra isn't ruling out an internal candidate to replace Switkowski and is looking for a chief executive who will be committed to the company for a five year period.

Several senior Telstra executives have been touted as potential candidates including Bruce Akhurst, who heads the broadband division, David Moffatt, who runs the consumer business, and business and government division boss David Thodey.

But these internal candidates will face very strong competition from the cream of international corporate talent, attracted by the prospect of running one of the world's largest telecommunications companies.

Switkowski will receive a termination payment of A$2.09 million.

Close to the Howard government as the former head of the nation's farm lobby group, McGauchie said legislation paving the way for the company's full privatization is likely to be passed by the end of 2005 with the actual sale taking place in 2006. The previous sales tranche, called T2, was sold to investors at A$7.40 a share.

-By Stephen Wright, Dow Jones Newswires;
61-2-8235-2950; stephen.wright@dowjones.com
-Edited by Ian Pemberton

(END) Dow Jones Newswires "

Posted to the site on 1st December 2004