A year on and Telstra chief must still prove his worth

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It will be all eyes on Sol Trujillo today as the controversial American marks his first anniversary as chief executive of Telstra with a rare high-profile speech.

A veteran telecoms executive who came to Australia after stints at US West and Orange in the UK, Mr Trujillo was brought in to shake up the former monopoly ahead of its full privatisation.

Few, however, predicted the roller-coaster of the past year.

Profits warnings, public disputes with regulators, a stock market investigation into alleged improper disclosure practices and allegations of cronyism by Mr Trujillo have combined to produce one of the most turbulent periods in Telstra’s history.

Its share price has dropped nearly 30 per cent against a rise of about 16 per cent in the ASX/S&P 200 benchmark index and, with a huge capital expenditure programme looming, initiated by Mr Trujillo, there are questions about the sustainability of its dividend.

Such difficulties mean the government is months behind schedule in approving a timetable for the sale of its remaining 51.8 per cent stake.

While analysts say the A$25bn (US$18bn) privatisation could be aborted, the signs are that the government and Telstra, both of which are anxious for the sale to proceed, are inching towards the compromises needed.

A significant breakthrough came last week when the government accepted Telstra’s operational separation plan, a key prerequisite for improved transparency and competition in the telecoms market, after knocking back a proposal in February.

The new commitments go well beyond an accounting separation, requiring Telstra to have separate staff and premises for its retail and wholesale arms.

The agreement leaves Telstra’s planned fibre broadband network, costing up to A$4bn, as the main outstanding regulatory issue.

After protracted negotiations over access to the network – Telstra initially suggested it should not have to allow rivals to use it at all – it is hoped that Mr Trujillo in his speech today will outline a blueprint acceptable to the competition authority.

If so, then analysts believe there will be sufficient regulatory certainty for the government to approve the sale in the coming weeks, in time for an offering in October or November.

The planned fibre network is important for Australia as it would plug an important piece of missing infrastructure. Reaching 4m homes, its internet speed would be about 100 times today’s standard broadband packages, more than enough to carry internet television and other advanced multimedia applications.

As such, it is a critical piece of Mr Trujillo’s convergence strategy, capitalising on Telstra’s valuable media operations: the Sensis directories business, its Bigpond internet service and its 50 per cent stake in Foxtel, the pay-TV company.

“Telstra is one of the best-placed telcos in the world to profit from the new developments in digital media,” says Paul Budde, a local telecoms consultant. “With [Telstra’s media companies] to work with, Sol Trujillo has a golden opportunity.”

Access pricing to the network is vital because many analysts question whether Telstra will achieve an economic return on its investment, one of the main elements of planned spending of A$11bn on new technology over five years.

These ambitious investment plans have created uncertainty about future pay-outs. Analysts such as Andrew Hines at Morgan Stanley believe that, after 2008, an annual dividend of just 22 cents a share will be sustainable, down from 28 cents. This is troublesome for the privatisation, given that Telstra’s high yield, at about 7.5 per cent, is one of its main selling points.

After initially talking up the possibility of offloading its entire stake on the market in one tranche and combining it with a large share buy-back, most observers believe the government will have to park some of its holding in the Future Fund, a new vehicle set up to finance public sector pensions.

As for Mr Trujillo’s record, most analysts believe he initially misjudged the political environment and was overly aggressive, allowing the company to get bogged down in regulatory battles.

On controversies over his appointment of several former associates to Telstra’s top team and his use of favoured suppliers, analysts say it is not clear whether these will prove positive examples of Mr Trujillo using his experience and contacts for Telstra’s benefit, as he maintains, or cronyism – as his critics in the media and parliament allege.

Most believe his overall vision for Telstra is the right one.

“Many of his longer term initiatives are entirely necessary. He has made the right strategic calls,” says Tim Smart, telecoms analyst at Macquarie Bank in Sydney. “But the execution is yet to come. He is attempting a very aggressive and challenging transformation. It is far too early to judge his record.”

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