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A dispute between the Australian government and Telstra intensified on Monday as the telecoms company warned that profits in the year to June could drop by as much as 10 per cent because of regulatory proposals.

The earnings warning, which wiped more than 5 per cent off the share price, further muddied the outlook for a planned A$30bn-plus sale of the government’s remaining 51.8 per cent stake next year. The shares closed at A$4.24, well below the offering’s target price of A$5.25.

The warning followed Telstra’s statement a month ago that net profit would probably fall from the A$4.45bn reported for 2004/05.

Sol Trujillo, chief executive, said the outlook could deteriorate even further if regulatory decisions by the Australian Competition and Consumer Commission went against it.

Coming just days before the government presents legislation to enable the sale of its Telstra stake, the warning highlighted growing acrimony between the government and Telstra. One banker described the dispute as “an extraordinary game of brinkmanship that would be laughable if it wasn’t so serious”.

Telstra said it expected earnings before interest and tax for the year to June 2006 to fall 7-10 per cent because of declining revenue from mobiles and high-margin fixed-line services, and government plans to tighten regulations.

Mr Trujillo said the plans, which include splitting Telstra’s operations into wholesale and retail divisions and forcing the company to give rivals access to its fixed-line network at reduced prices, could cut sales in the year by more than A$850m.

Mr Trujillo said the guidance was based on a review of trading results for the first two months of the current year and preliminary data from a strategic review of management and operations.

Investment banks downgraded their forecasts on the statement. Macquarie Bank revised its outlook for 2005/06 net profit by 10 per cent to A$3.77bn, about 15 per cent below the previous year.

Analysts also said the profits warning raised questions about the performance of Telstra’s previous management.

“We have known broadly about these trends, but because Telstra is in the unusual position of controlling so much telecoms infrastructure and two-thirds of the whole telco market here, it has been able to manage the declines well,” said a telecoms analyst at a leading investment bank.

“Why didn’t anybody see this coming? It tells you a lot about Telstra’s internal systems and forecasting abilities.”

Mr Trujillo has repeatedly warned since taking over Telstra in July that tighter regulation would seriously undermine the company’s ability to generate profits for shareholders.

The privatisation plans have raised questions about Telstra’s basic service obligations to remote parts of rural Australia, and have triggered in-fighting within the governing coalition of Prime Minister John Howard.

Copyright The Financial Times Limited 2019. All rights reserved.

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