Hello, Asia: Telstra Calling

The Aussie telco sat tight during the boom. Now, it's shopping

Let other telecom operators talk about hunkering down in the wake of scandal. Ziggy Switkowski, chief executive of Australian giant Telstra Corp. (TTRAF ), is moving fast. In early July, Telstra paid $475 million to take full control of Hong Kong's most lucrative mobile phone operator, CSL, from Pacific Century CyberWorks (PCW ). At the same time, Switkowski announced plans for a venture with SVA Group of Shanghai to provide telecom services. "Our focus is on Asia," he says. "We see opportunities."

At a time when the global industry is still shell-shocked from the collapse of the telecom bubble, Telstra is an anomaly--an aggressive telecom company on the prowl. And the Melbourne-based operator can afford to go on a buying spree, since--unlike its U.S. and European counterparts--it didn't spend billions buying up other companies at far higher prices two years ago.

The fundamentals are good, too. Telstra controls 90% of the fixed-line Australian market and enjoys steady profits. Analysts estimate that for the fiscal year ending in June, 2002, Telstra earned $2 billion on sales of $11.2 billion. "It's in the top tier of telecom companies globally," says Andrew Lally of Standard & Poor's Corp.

Ironically, one reason for Telstra's strength was until recently seen as a hindrance. Telstra started out as a state-owned monopoly, and the government still owns 50.1%. It would take a bill in Parliament to dilute the state's stake, so Telstra has been unable to use shares as acquisition currency. "Telstra was hampered from moving aggressively offshore," says Tim Smart, an analyst with Macquarie Equities Ltd. in Sydney.

Now, when valuations are low, that is about to change. The deficit-ridden Australian government is eager to sell off its Telstra holdings. And while deregulation has resulted in an Australian phone explosion--there are now more than 100 telecom companies of various sorts in a country of 19 million people--antitrust considerations prevent Telstra from buying much at home.

So Switkowski's best opportunities are in Asia. Besides CSL, Telstra has a joint venture with PCCW, called Reach, to operate an undersea cable that Telstra says is Asia's largest carrier of voice and data services. Switkowski also wants to use CSL as a launchpad into China, where Telstra already is helping China Unicom Ltd., the second-largest Chinese mobile operator, build out its CDMA network. Switkowski says Telstra is looking for other deals in Greater China, as well as in Japan and Southeast Asia.

This is not a cakewalk: Telstra has plenty of competition for the Asian market. Perhaps most formidable is cash-rich Singapore Telecommunications Ltd. SingTel last year bought Optus, the No. 2 Australian carrier, and is determined to use the Sydney company as part of its own Asian expansion, which already includes China, India, and several countries in Southeast Asia.

Telstra will also have to fight--or buy--to increase market share in Hong Kong. The cellular market there is overcrowded, with six players engaged in a nonstop price war to win customers among a population where just about everybody already has a mobile phone. Some also question whether Hong Kong can really be used as a springboard into the China market. Nick Ingelbrecht, an analyst with Gartner Group Inc. in Perth, scoffs that Telstra's plans are one more case in which "the old China card gets dragged out and waved around. I don't think anyone is persuaded by it."

One thing in Telstra's favor: There aren't a lot of other companies with the ability to go shopping. "We have a gold-plated balance sheet," says Switkowski. When the dust settles, Switkowski, who boasts a PhD in nuclear physics, predicts Telstra will be a new regional power. Of course, Asia has seen ambitious foreign telecom operators sweep in with grand plans only to retreat a few years later. Switkowski can only hope his luck will hold.

By Bruce Einhorn in Sydney

    Before it's here, it's on the Bloomberg Terminal.