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    WASTED ENERGY

    Energy Australia chief Paul Broad made a call on a large holding in telco Powertel - and got the wrong number. Alan Deans reports. BY ALAN DEANS


    If Paul Broad was the boss of a listed company, shareholders would be baying for his blood. It's not just that returns from the giant NSW government-owned power utility that he heads are a mere one-third of their level of three years ago. It is also the $90m Energy Australia lost in start-up telecommunications company PowerTel.
    That debacle has come into stark focus in recent weeks as two keen-nosed investors, Telecom Ventures Group from Hong Kong and a Sydney syndicate called Roslyndale, battled to win control at a rock-bottom price. Both have told The Bulletin that PowerTel is a prize. It is on the cusp of turning its first profit and there are plans to greatly extend market reach. They believe it has every chance of tackling Telstra head-on in the lucrative corporate telecommunications market, and also of giving Optus a run. Such prospects don't come along every day.
    Yet Broad, who had a central role during the bidding and who as a director has intimate knowledge of PowerTel's nascent turnaround, has sold all but a rump of Energy Australia's investment at distressed prices. Having held true through five tough years, when the telco stacked up losses of $435m, Energy Australia now has no chance of reaping any of the upside. NSW taxpayers will bear the cost.
    The electricity utility initially paid $105m for its shareholding. Within two years the value of that had shot up to $750m as PowerTel shares topped $3.50 each. Being a core investor, however, it didn't sell. The price plummeted after the tech wreck in early 2000, yet Energy Australia didn't exercise an option to bale out at its entry price. Soberingly, sizeable share sales in recent days have netted it only about $9m.
    An Energy Australia spokesman explained that the PowerTel selldown occurred because it was no longer seen as a strategic asset. Broad was not available to comment, the spokesman saying that he was too busy. Yet he remains on the PowerTel board. Energy Australia also has 15 years to run on a contract allowing PowerTel access through its electricity ducts to high-rise buildings in Sydney's CBD, and is entering a marketing venture with PowerTel to sell telephony and data services.
    To understand Energy Australia's role, it is best to go back to square one. Energy Australia saw an opportunity in 1998 to profit by selling access to its inner-city electricity ducts to a telephone company. It teamed up with Melbourne's Citipower and Brisbane's Energex to boost the attraction, forming a consortium called Downtown Utilities in which it held 70%. A US telco, Williams Communications, won the tender and with Downtown it launched the aptly named PowerTel.
    After floating, the new venture spent $325m on a state-of-the-art fibre network linking Melbourne, Sydney and Brisbane and points in between such as the Gold Coast and Newcastle. It offered CBD businesses cheap deals to communicate with their interstate offices. PowerTel had an edge because it bypassed the high cost of entering buildings via Telstra's network. Despite large start-up spending, revenues soared in 2002 by 112% to top $100m. In the six months to June 30, it became cashflow positive and next year it could post its first profit.
    Problems started, however, when Williams was declared bankrupt and its interest was put on the market. Roslyndale, a group that includes noted business figures Trevor Kennedy, Geoff Cousins and Sam Gazal, had been patiently waiting for the right telco deal. It offered $14m to buy Williams' entire holding of shares and debt.
    Downtown Utilities considered making an offer itself by exercising pre-emptive rights it held over the Williams interest. It decided not to but Roslyndale suddenly found that its deal had been shopped to a media fund being formed by investment banker, Gresham Partners. Gresham planned to bring in TVG as a partner, and later offered Roslyndale a one-third interest.
    That deal fell through, however, when Gresham and TVG pulled out. Roslyndale was left alone with its original plan, which it unveiled in May. TVG popped up again, however, in June with a takeover bid priced at 3¢ a share. The TVG offer was only about half the market price but it was aimed solely to win the Williams holding.
    When shareholders met in August to approve the Roslyndale offer, it looked like the Sydneysiders would win. They won approval from PowerTel's board and Downtown said it would not vote against it. At the last minute, however, TVG lifted its offer to 3.85¢. Downtown quickly changed its mind and voted against Roslyndale, torpedoing the offer despite big support from small investors.
    Roslyndale did not give up, however. It raised its bid to $22m for a 20% stake plus the Williams debt. TVG countered by offering to pay $10m for the Williams debt as well as 3.85¢ for the shares. It won, and now has an unbeatable 48% stake.Downtown explains its change of heart by saying the higher bid was in the best interests of shareholders. Yet it did not accept the 3.85¢ offer itself, later selling at an average of about 6¢ on market. Only about 1% of minority shareholders sold to TVG.
    "I am seriously angry about the way that Energy Australia conducted itself during the proceedings," Kennedy says. "They would not talk to us about the transaction. The least that any party should do is listen to what is being offered. We even had stockbrokers arrange underwritten deals to buy them out but they refused. [NSW Treasurer] Michael Egan should sack the board."
    Meantime, Broad continues to play an influential role. At a PowerTel shareholders' meeting last week called to approve a $50m capital raising, he recommended that investors give their backing. What they did not know was that Energy Australia had earlier not been prepared to put in any fresh money. Broad's spokesman denies any conflict. He says that Broad was acting in two different roles - one as the boss of Energy Australia and the other as a PowerTel director. He wears two hats.
    In the meantime, the cash injection will help transform the telco. Its balance sheet will be greatly strengthened, debt being cut to about $40m, and it will now assure customers that it has a secure future. TVG's Edward Sippel says that the bottom line will improve, with increased profitability down the road.
    PowerTel's new chief executive, Shane Allan, won't predict when the company will move into the black but says it will happen. He aims to increase the traffic on the fibre-optic network, first by expanding its reach and later perhaps by taking over rival telcos. It plans a three-fold boost in its market coverage by offering data and voice services through DSL (digital subscriber line) to business customers outside of the CBDs. It is one of the few operators that can offer voice services over DSL. Allan says this can be done competitively using the Telstra copper network or by installing fibre for larger clients. He says that this will be achieved at low cost, with budgeted annual capital expenditure being $10m-$12m.
    With its assets already in the ground and operating reliably, profits should surge given sharply reduced interest costs and depreciation charges. Internal forecasts are for revenues to approach $150m this year, nudge $200m in 2004 and head towards $250m in 2005. PowerTel is about to become a prolific cash cow, and those who have stuck with it should benefit.
 
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