Unleashing Optus

SingTel's Chua Sock Koong didn't actually confirm that her group was considering re-listing Optus, but she did say she was prepared to look at it, although no decision had yet been made. With Optus revitalised, it is as well positioned for a partial sell-down as it has ever been since SingTel acquired it almost a decade ago.

That may be deliberate. For most of its history as a SingTel subsidiary Optus has been kept on something of a leash, with its capital expenditures tightly controlled. Its purpose within the wider SingTel group was, along with the group's core Singaporean businesses, to provide a solid and stable base of cash flows to balance a riskier but very successful growth strategy within Asia.

However, more recently it appears that Optus' long-serving and well-respected Paul O'Sullivan has been let off the leash.

Optus has been very aggressive in its wireless offerings, grabbing market share. It is investing heavily in spectrum and its coverage to improve the reach and quality of its mobiles business, upgrading its HFC cable network to 100Mbps, and, in short, would now be able to offer a growth story to the market if SingTel chose to sell down.

Chua chose her words carefully, giving nothing away about SingTel's intentions and saying only that the group regularly reviews its investments in subsidiaries and associates. However, there has been intense speculation of a sell-down and Optus is behaving like a group preparing for a float, or at least being positioned to give its parent options.

A 16.9 per cent increase in earnings for the nine months to end-December, a 12.2 per cent increase in free cash flow, and a 13.8 per cent increase in mobile revenues for the nine months reflects the rekindled momentum within the Australian business.

If SingTel did want to sell down – there is a view that the conservatively financed group would like to release a big lump of cash to acquire another big mobile business in a younger and faster-growing market – O'Sullivan has given it a good story to take to the market (Time to sell Optus? January 15).

The best part of the story is the growth occurring in its mobile business, the biggest part of Optus. As previously discussed (Winning the iPhone war, November 11), Optus astutely seized the moment provided by the original launch of the iPhone in this market to mount a campaign to win back market share. It sacrificed margin but ignited its previously dormant top line.

For the December quarter mobile revenue grew by just under 10 per cent, and for the nine months 13.8 per cent, with O'Sullivan saying Optus had increased its revenue market share. It sacrificed two percentage points of margin (from 27 per cent to 25 per cent) but generated 15.9 per cent growth in the number of post-paid subscribers and significantly lowered its churn rates.

There has been substantial growth in the number of 3G subscribers its non-SMS data revenues, reflecting the success of the smartphone strategy. The flip-side of that strategy showed up in an increase in subscriber acquisition costs from $179 a year earlier to $211 in the December quarter.

Optus' bet on the iPhone caught Telstra napping and lacking in flexibility as a result of its much-delayed new IT and billing systems. Telstra has only recently been able to sharpen its wireless pricing. Vodafone and Hutchison have been pre-occupied with their merger integration, which meant that the Optus strike was perfectly timed.

Whether SingTel does decide to refloat Optus or not (it would be mindful that, while it remains committed to a continuing stake in Optus, it would lose direct access to Optus' growing cash flows if it sold down), Optus is better positioned to capitalise in the explosive growth in wireless ignited by the new generation of smartphones and the sea-change in fixed-line services that would accompany the roll-out of the national broadband network that it was a year and a half ago.

Telstra has been showing a renewed ability and determination to be more price competitive, although it has to deal with the enormous distractions created by the NBN and Stephen Conroy's threats to dismember its businesses. Vodafone Hutchison will no doubt become more aggressive as it puts the merger process behind it. The NBN will create both threats and opportunities for Optus.

If SingTel does want to cash out some of its Optus interest, the timing and Optus' own condition would be just about as good as it could be for a float.