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Feb 26, 2009

McGauchie loves Sol, shareholders not so much

The worst-kept secret in corporate Australia has been confirmed, writes Adam Schwab.

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It was certainly fun while it lasted.

This morning, Telstra confirmed the worst-kept secret in corporate Australia, announcing that CEO Sol Trujillo was resigning his role and returning to the United States at the end of June. Telstra chairman, Donald McGauchie was effusive in his praise for Trujillo, noting that “his vision, strategic direction and commitment to execution have positioned Telstra as a media communications company with a wide range of options for ongoing growth … under Sol’s leadership, Telstra has significantly outperformed the market and its global peers, producing world-leading results within the telecommunications sector…. The Next G™ network is undeniably the world’s best national mobile broadband network and stands as Sol’s crowning achievement.”

While the Telstra Chairman was happy with Trujillo’s performance, Telstra shareholders may be slightly less impressed. When Sol was appointed in July 2005, Telstra shares were trading at around $5.20 — yesterday they were at $3.71, a drop of approximately 28% in four years. Notwithstanding the global financial crisis enveloping sharemarkets in the past 18 months, Telstra’s position as the monopoly provider of foxed line telecommunications services should have placed it in a unique defensive position. (By comparison, other dominant telecommunications companies outperformed Telstra in recent years — US-based AT&T’s share price is steady since July 2006, while Singapore Telecommunications is up by 45% over the same period).

Trujillo (who was previously the CEO of US West in the United States) brought with him a very American style of doing business. Along with Communications chief, the outspoken Phil Burgess, Telstra adopted an aggressive stance towards the ACCC and Federal Government, culminating in December when Telstra was excluded from the tender process for the National Broadband Network after failing to include a plan on how to involve small and medium enterprises. Telstra’s election to not include such a plan, which would have taken less than a day to prepare, led to the company’s share price dropping by 16 percent the following day.

Some analysts question whether Trujillo’s combative stance has been appropriate in Australia and whether Telstra shareholders have ultimately benefited from the company’s less-than-cordial relations with regulatory authorities.

Since his appointment, Trujillo has also placed a very heavy reliance on costly, outside consultants. The Australian revealed in September 2006 that months after he became CEO, Trujillo appointed management consultants, Bain and Accenture, to develop “a comprehensive multi-year plan for the most rapid and dramatic ever transformation of a telecommunications company worldwide.” For around 120 days work in 2005, Telstra allegedly paid Bain around $54 million — or approximately $45,000 per consultant, per day — roughly four times the cost of other leading consulting firms. The apparent success of the Bain-led transformation plan was believed to be a key factor in Trujillo receiving a multi-million dollar cash bonus payment the following year.

Trujillo will depart from Australia far richer than when he arrived. Of course, Sol was a wealthy man before he set foot in the country, having received a controversial US$72 million termination payment from US West after the company merged with fellow Telco Qwest in 2000. Trujillo’s termination payment included “a $US36.9 million “change-in-control” payment, $US13.7 million in pensions, $US10 million for signing the agreement and $US2 million for office space and administrative support.”

Notwithstanding his substantial wealth, the Telstra board authorised payments to Trujillo of $8.7 million in 2006, $11.78 million in 2007 and $13.39 million in 2008 (Trujillo’s 2009 remuneration will be revealed later this year). Remarkably, Trujillo also managed to receive between 86 and 88 percent of his short-term cash bonus in any of those three years, despite Telstra’s share price underperforming rivals such as AT&T and SingTel.

Telstra also released its financial results for the six months ending 31 December 2008 this morning, revealing a decrease in profit for the period of one percent to $1.92 billion and lower EBITDA guidance (although sales revenue was up by 3.2 percent). Following the trend of previous periods, Telstra recorded strong growth in mobile and broadband revenue, and another impressive performance from Foxtel and Sensis, but a continued drop-off in PSTN revenues. Telstra also continues to borrow to pay its lofty dividend to shareholders, with the company’s total debt rising to $16.4 billion.

Telstra shares fell by six cents this morning to $3.71.

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