AAPT the albatross around Telecom's neck

Four profit downgrades in six months, an economy in recession and a US hedge fund baying for boardroom scalps would lead any chief executive to ponder what respite lies across the Tasman.

Alas for the tall Scotsman, that horizon bears only clouds. More than 18 months since Telecom paid $320 million for the fixed-line broadband operator PowerTel, its Australian subsidiary AAPT is still bleeding red ink.

"AAPT continues to be a noose that Telecom put around their own neck, and they're doing the best they can to make the horse they're sitting on gallop away," a former AAPT executive said.

The decision of AAPT last week to pull out of the Optus-led Terria consortium that is bidding on the $15 billion-plus national broadband network has only increased attention on its lacklustre performance.

"We are the third-largest fixed-wire carrier after Telstra and Optus and are worth something like $1.2 billion of sales revenues, but we have had no profit over the last couple of years," its general manager of strategy, Clive Poolman, told a Senate hearing two weeks ago.

Poolman is an 18-year veteran of AAPT and said its predicament summed up the woeful state of the industry. Profits from Australia's 700-plus telcos and internet service providers were "zero", he said. "Telstra and Optus are making 100 per cent, or 105 per cent, of the total market profits."

AAPT, with about 400,000 retail customers, says it is "very, very difficult for an entity" like the Australian Competition and Consumer Commission to regulate and maintain a level playing field because the industry is dominated by a "vertically integrated monolith" in Telstra.

Not that its decision to withdraw from Terria helps the cause of Telstra's competitors. In fact, it is a serious blow to the consortium's credibility as a viable native. Optus and AAPT were the only companies with any weight in the consortium, which has shrunk from nine to seven firms, including the telco tiddlers Internode and Macquarie Telecom.

Since Telecom bought AAPT for $1.5 billion in late 1999 - at the top of the cycle, just months before the tech wreck - it has repeatedly proved to be a dog of an investment.

The cost to New Zealand's largest public company was highlighted in 2006 when the New Zealanders wrote down AAPT's carrying value by $1.165 billion to $270 million.

In November, Telecom's then chief financial officer, Marko Bogoievski, boasted that AAPT could double its annual pretax earnings to $200 million within two years. But that target has been scaled back amid such problems as a bungled migration of customers on to a new billing and services system.

Two years ago Telecom ditched plans to sell AAPT, although some telco executives say it unofficially remains on the chopping block.

The most attractive part of AAPT is the wholesale business it inherited from PowerTel.

But potential buyers remain scarce. Of the three interested parties two years ago, Commander Communications has gone broke, PowerTel was bought by AAPT, and Optus - as one executive puts it - had "too many brains to buy them".

Macquarie Equities agreed that while the sale of "non-core assets such as AAPT are a possibility, finding a buyer in the current market environment . will be a challenge to say the least".

AAPT's knockabout chief executive, Paul Broad, dismisses suggestions the business is for sale. "Everyone talks about consolidation . [but] there is no pressure for us to be selling AAPT," he said before adding: "You never say never in life."

The decision to pull out of Terria, Broad said, reaffirmed Telecom NZ was "fully committed back home" and had no spare cash on the balance sheet to invest in an Australian broadband network. "It doesn't mean we are not going to be part of the debate," he said.

So where to from here?

Few hold much hope of a dramatic improvement in performance. "It is going to take someone to devise a strategy that is actually going to work and have the commitment to follow through with the strategy," a former AAPT executive said. "For seven years it's been a process of drift. It looked like a slow death from the inside and it looks like that from the outside, too."

It certainly appears that Telecom will not divert any cash to its Australian arm. It is already overcommitted in New Zealand, spending $NZ2.4 billion ($2.1 billion) over the next two years on mobile and broadband networks.

The AAPT albatross is just one of many unresolved problems for Reynolds. Since he took over as chief executive from Theresa Gattung last September Telecom's share price has fallen 46 per cent Telstra's has fallen 8 per cent.

It is enough to make him anyone want to hang up.