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Telstra Net Slides Amid Discussion Of Equity Offering
By Lyndal McFarland
The Wall Street Journal
Thursday, August 10, 2006

SYDNEY, Australia -- Telstra Corp. said annual net profit slumped 26%, the last results to be reported by Australia's biggest telecommunications company before the government decides the fate of its US $19 billion privatization proposal.

Analysts said the decrease in profit will weigh on Canberra's decision about its 51.8% stake in Telstra.  Prime Minister John Howard and senior ministers will decide as soon as Monday how best to sell the third tranche, a process known by investment bankers as T3, which will rank as one of the world's largest equity offerings.

Telstra said net profit for the 12 months ended June 30 fell to A$3.18 billion (US $2.42 billion) from A$4.31 billion a year earlier.  The company cited lower earnings at its fixed-line business, tough competition in the mobile division and a A$427 million provision for job cuts as part of Chief Executive Sol Trujillo's five-year turnaround strategy, which includes investing billions to upgrade networks as well as laying off as much as a quarter of the work force.

Revenue rose 2.7% to A$22.8 billion, boosted by higher broadband and mobile revenue, but sales at the company's fixed-line division fell by 6.7% to A$7.48 billion as more customers discarded their home phone lines in favor of mobile services.

Telstra declared a final dividend of 14 cents a share, in line with expectations, but Mr. Trujillo said no decisions have been made about future dividend payments.  Telstra's dividend yield is a key draw for the millions of retail investors who hold the stock, and any signs of a cut could scuttle a T3 retail offer, analysts say.

Telstra shares were two cents lower in early trading on the Australian Stock Exchange at A$3.78.  Canberra sold its second tranche of Telstra shares at A$7.40 in 1999.  The stock has been under sharp pressure since then as the global telecom sector has confronted stiff competition and overcapacity problems.  Telstra has also been under the microscope for a flawed Asian expansion strategy and local competition from rivals such as Singapore Telecommunications Ltd. and Vodafone Group PLC.

Earlier this week, Telstra said it won't go ahead with plans to build a broadband network in Australia, as negotiations with regulators collapsed over the issue of sharing the network with competitors.

Australian Finance Minister Nick Minchin, who is charged with the T3, said recently that a retail offer, once considered the mainstay of Canberra's divestment, is looking less likely given regulatory uncertainties and lackluster demand from both retail and institutional investors.  But the government clearly wants the 6.44 billion Telstra shares off its books.

-- Barbara Adam in Canberra contributed to this article.

Write to Lyndal McFarland at lyndal.mcfarland@dowjones.com


http://online.wsj.com/article/SB115516410816431522.html?mod=telecommunications_primary_hs