Telstra makes first investment in China

Telstra, Australia’s dominant telecommunications company, on Thursday made its first investment in mainland China by buying a majority stake in SouFun, the leading Chinese real estate website, for A$254m.

The purchase underlines the need for Telstra to look for growth opportunities outside its domestic market, where it is facing mounting competition and falling revenues in its fixed-lined telephony business. Telstra will fold SouFun into its Sensis advertising and directories business, which is seen as a driver of growth.

It also comes as the Australian government prepares to divest its remaining 51.8 per cent stake in Telstra, partly through a A$8bn public offering.

Sol Trujillo, chief executive, said that the purchase of 51 per cent of SouFun was “an attractive entry point into China” that would hopefully generate “other opportunities.” Separately, he also said on Thursday that Telstra was “monitoring” plans by Telecom New Zealand to divest its yellow pages business.

The deal for SouFun, which generates most of its revenue from online display advertising, is the second under Mr Trujillo, who took the helm of Telstra in July of last year. In December, Telstra agreed to a merger of its Hong Kong wireless unit with another local company.

To help fund the SouFun transaction, Telstra agreed on Thursday to sell a domestic pension services subsidiary to Pacific Equity Partners, the Australian private equity firm, for A$215m. As a result, Telstra said the SouFun deal would represent a cash outflow of only A$91.5m.

Telstra said it was buying a company that is profitable, cash flow positive, and set to add A$52m to its revenues in the coming year and boost earnings per share in the third year.

John Stanhope, chief financial officer, said the fact that the Chinese takeover was coupled with a domestic divestment meant that it was “easily within the financial capacity of the company while we continue our transformation.”

He also said the business was self-funding and would therefore not require additional money from Telstra as it continued to expand across China.

Founded in 1999 by Vincent Mo, SouFun initially focused on four cities, but has since developed its real estate coverage to 40 cities. Mr Trujillo said its online audience of 40m unique users per month and its 4,500 advertisers made SouFun “a global online success story.”

Mr Trujillo also noted that China’s real estate sales represented last year about 7 per cent cent of the country’s gross domestic product.

Mr Mo has agreed to stay with his company for at least three years.

Separately, John Fairfax, the Australian media group that is also seen as a potential bidder for the New Zealand yellow pages business, reported on Thursday that net profit in the last fiscal year fell 7 per cent to A$227.45m, as revenues from advertising declined.