John Linton
.....the demise of Commander is some sort of indication that the 'non-recession' and the 'non-credit crisis' is having the inevitable effects on companies that take on debt to 'grow' their businesses.
I had previously referenced Commander as a company in a lot of trouble (based on the ongoing press reports of its condition) and the announcement that their lenders had appointed receivers last week came as no surprise:
http://www.zdnet.com.au/news/communications/soa/Commander-appoints-administrators/0,130061791,339291155,00.htm
There was a little more detail in Saturday's AFR but not much with the base information being that Commander owed it's lenders some $A300 million and had reduced its earnings forecasts from around $A75 million for the 2008 financial year to around $A5 million over the past six months and had failed to sell off any of it's acquisitions to reduce the size of its borrowings (the acquisitions being basically worthless).
Over the past 12 months Commander terminated over 50% of its 2,000 personnel and the future looks bleak for the remainder - itself a set of personal tragedies as I doubt that anyone ever feels sorry for banks who make injudicious loans. In the case of Commander it's almost impossible to understand how it, a spin off from Telstra with enormously profitable business contracts and a very decent size of market share in its field of operations, could be run into bankruptcy but then, stranger things have happened. So, people who read about such things just shrug their mental shoulders and dismiss the issue as one more stupid set of decisions by incompetent management and turn the page.
If the page was in Saturday's AFR then they may have noticed a larger article on the opposite page about Telecom/NZ's FY2008 results which, while they won't result in the company incurring the wrath of their lenders, painted a dismal picture - particularly on this side of the Tasman with further write downs of AAPT's asset values and a tightly worded statement from APPT's new CEO (the ex Powertel CEO) about moving call centres to the Philippines and further personnel reductions other than that. There were also more vaguely worded coments about moving away from 'big business' and 'concentrating on smaller business' and 'attempting to resolve the poor performance of the residential divisions'. Paul Broad made a lot of money for Powertel's share holders and was handsomely rewarded by them for selling the business to telsco/NZ who in turn also handsomely rewarded him by making him CEO of the combined operations. A new definition of win/win?
The fact that a previously highly profitable division of Telstra can go bankrupt within ten years of being spun off as a separate entity and the fact that Australia's third largest wire line communications company can have its assets written down from almost $A2 billion to practically zero within five years of being taken over by New Zealand's largest communication company are some sort of sign of the times definitely changing and definitely not being easy. Not that any business sector is ever 'easy' but the two pages of Saturday's AFR indicated that the number of 'swallows' had doubled from the number that could be, if not disregarded, then regarded as not yet of concern.
Perhaps this is the first of a number of indications that Australia is approaching/already in very difficult financial times (whether you want to use the 'r word or not is immaterial to the 2,000 people who have or will lose their jobs in these two companies 'issues' - they definitely face financial difficulties). it seems pretty certain that, dependng on the financial terms of any contract, 2006/2007/2008 was and is the wrong time to have incurred any sort of long term debt (to have incurred short term debt in that period would have been even worse). Lenders simply have no flexibility in their ability to borrow (in order to continue to 'roll over' the money they have already borrowed to lend on) and therefore are 'closing down' loans they have already made if there's the slightest 'hint' of repayment problems - particularly if the loan is at 'old/low' fixed interest rates.
I have no idea what communications companies have heavily borrowed over the past three years to roll out new infrastructures but the fact that all of the small wireless/wimax/VoIP companies that appear in the press recently all do so because they have been forced out of business because they couldn't service their debt they incurred to build their infrastructures (even with $A500 million in Federal Government subsidies over the past few years) is some sort of sign that such borrowings are a deadly burden if they aren't matched with 'immediate' profitability:
http://www.australianit.news.com.au/story/0,24897,24160608-15306,00.html
As the Commander scenario also underlines, borrowing to acquire 'economy of scale', or worse, 'synergy' was not the smartest decision in 2007 onwards when the financial storm clouds are so very clearly visible on the horizon. (anyone who has ever sailed knows just how close the horizon really is). Also this sort of summarises just why some of these things might be happening:
http://www.australianit.news.com.au/story/0,24897,24164960-5013641,00.html
Fortunately, Exetel has no debt and therefore I can read the AFR with only a little more than mild interest in what is happening in the financial world of borrowing and lending and how the non-recession and non credit crisis are affecting the various sectors of the Australian economy. However what does interest me is how the current situation (whatever it really is) is going to affect Exetel's buy pricing and our competitor's sell pricing. I haven't seen any significant changes so far but I do seem to detect some signs that communications companies are seeing changes in their various market shares and customer bases that are evident from the various changes different companies are making to their service offerings and also their end user pricing - both people we buy from and people we compete with.
I doubt whether Commander is going to be the last largish communications provider to go out of business this calendar year and I would think that more small communications businesses will also go out of business or be 'swallowed up' before Christmas.
The challenge is to ensure that Exetel isn't one of them.