Crullers reports on the recent AGMs of Orange and Open Tel, and charts some of the chequered history of Wayne Passlow’s once golden telecommunications stock.

Both companies’ share prices have taken a hammering and, but for the deep pockets of its parents, Hutchison could be knocking on death’s door along with Wayne Passlow’s OT.

Let’s have a look at the history of both companies before Dr Crullers delivers his prognosis on the ailing companies.

Open Telecommunications – the cult of personality

OT is one of those companies that has seemingly been a “one man band”, its rise and spectacular fall engineered by chairman, managing director and majority shareholder Wayne Passlow.

Passlow founded the telecommunications systems provider in 1992 and has very much been its public face since. To a distant observer, he probably hasn’t been an objectionably ubiquitous high flyer cum media tart, so we take no particular delight in seeing the company’s fall and definitely don’t intend this to be a grave-dancing or tall-poppy lopping exercise.

When he made his debut on the 2000 BRW Rich List (with a net worth estimated at $890 million), BRW described him as having “anything but your standard image of a technology entrepreneur” and he was “known for his low-key approach”.

He did try to establish his credentials by referring to his 25 years’ experience in the telecommunications industry and was quoted in the BRW Rich List as saying “this is not a dot-com company run by a 25-year-old with a ponytail.”

Perhaps not, but chances are that it will soon join them in the tech wreck graveyard.

In a glowing profile in the SMH in March 2000 which focused on Passlow’s rapid ascent to the billionaires’ club (ah, the glory days), he was described as “the middle-aged electrical engineer from the North Shore”. He wouldn’t contemplate trading in his Lexus for a Ferrari because “for one thing my shares are in escrow for 16 months, and the other is that I probably wouldn’t be able to get my 52-year-old frame into it”. (Passlow was not allowed to sell his shares in OT until a month after the company released its results for 2000.)

So with his practical background and eschewal of the high life well and truly established, all Passlow needed, it seemed, was one vital ingredient – establishment backing.

This, of course, came via the Packers and the Murdochs – the same two Packers and Murdochs who jumped into bed with Jodee at OneTel.

And we aren’t talking about Big Kerry and Uncle Rupert.

Cisco also came on board as a shareholder, and entered into an agreement with OT for the development of voice applications systems.

Those days are now well and truly behind it. Of these three marquee shareholders, only the Murdochs remain on the share registry, with 3.36% of OT held through QP Investments.

Interestingly, some still perceive OT to be a Packer-Murdoch interest, with an AAP report in March referring to it as the “Murdoch and Packer-backed operation”.

So as shareholders clamoured to buy OT shares and pushed its price up to a high of $3.80 in April 2000, the more prudent shareholders would have stepped back and wondered whether there was any substance behind the company.

Too many related party transactions, not enough disclosure

So what went wrong?

Passlow was asked by one shareholder at the 2002 AGM whether he would have done anything differently if he had his time over again.

His response was that none of the things that went wrong for OT could have been foreseen. Their market virtually disappeared, with many dot coms collapsing and established telecoms companies like Telstra and Optus significantly cutting back on their expenditure on telecoms infrastructure.

Passlow said there was no way they could predict any of this, he didn’t think there were any signs that the company failed to pick up, and the malaise that OT was currently suffering was all due to market conditions.

Without trying to be to cute, the company’s assessment of “What happened in 2001” in its annual report suggests that perhaps they weren’t so judicious as they tried to expand in 2001 when in 2000 the telecoms market had shown signs of shrinking.

The offending paragraph says “Open Telecommunications ended 2000 in a strong position. As the fastest growing company in Australia for the three years to 2000, even when telecommunications markets begun to slow, we had a very profitable year. At the beginning of 2001, with global optimism and enthusiasm high, our staff levels grew rapidly to meet the expected continued growth.”

So the writing was on the wall before 2001 – despite telecommunications markets slowing, OT “expanded aggressively” (their words, not Crullers’).

Aside from OT not reading the wind change, which is always easy to criticise in hindsight, what other problems could the market have picked up about OT?

For a start, the company relied heavily on related party transactions.

While this is not necessarily a sign of imminent doom, it should be viewed with greater caution than independent contracts.

The company announced in January 2001, when things were still reasonably rosy a contract with the Indian company that had been causing the Packers grief – not an auspicious sign.

By the time of their June 2001 profit downgrade announcement, the official line was that the contract had “failed to materialise”.

In 2000, OT raked in almost $50 million (out of total revenues of $91.3 million) from a company called COMindico, a company established by Passlow in 2000. For the seven-and-a-half months it was still a related party in 2001, only $14 million was received from COMindico.

On 17 August 2001, Passlow bailed out of COMindico, selling his shares and quitting as a director.

After that, it gets murky as to what happened between the two.

OT and COMindico have a $90 million contract for the supply of software, which ends in July. It seems that OT has received nothing since Passlow bailed out of COMindico.

The two recently settled their dispute according to recent press reports. Passlow confirmed that COMindico was “still a customer” of OT, but when pressed in the AGM, he wouldn’t confirm whether or not COMindico was the company he referred to when he said that OT had recently settled a contractual kerfuffle with a customer.

This was strange given that it seemed to be on the public record, but leads us to another point about OT which should have worried the market – lack of transparency.

Passlow’s mantra at the recent AGM was that he couldn’t comment on forward-looking matters because the company was about to issue a detailed report card prepared by Deloittes and it would be inappropriate for him to say anything until the report was on the public record.

With the company’s future looking exceedingly grim, it’s disappointing that shareholders are not given any inkling of what the future might hold from the chairman at the AGM.

This isn’t the first time the company has been less than transparent in its disclosures to the market.

In March, it called on shareholders to approve a resolution to raise additional capital of up to $10 million through the issue of shares. The shareholders duly approved, but the company would not comment on what this additional capital might be used for. At the AGM, Passlow was again tight-lipped, only saying that the measure was intended to provide “flexibility” to allow for capital to be raised should something crop up.

At the time of the same announcement, Passlow refused to make any comment about the company’s future as OT was “about to report its full year result on about March 13”. He also refused to specify reasons behind changes of the company’s chairman and managing director (as he did again at the AGM).

The company also delivered an unexpected profit downgrade in June 2001 which caught the market by surprise.

And we all know that the market doesn’t like surprises.

The result was a further battering to their already beaten and bloodied share price, taking it down to 30 cents.

The other thing that should have caused concern with OT was when Passlow started selling down his interest in the company in March 2001. Admittedly a fair bit of the damage had been done by then. But if shareholders had followed the MD’s lead and bailed out at that time, they would have at least salvaged about 50 cents a share.

Today shareholders can’t sell because the shares have been suspended from trading, with the last sale at 5.1 cents on April 26.

Perhaps shareholders who joined up on the strength of the Packers’ backing might have also followed Big Kerry’s lead in September 2000, when CPH divested around 38 million of their 62 million shares.

The final thing that might have alerted shareholders that the company was sinking was the high turnover of executives.

Again, this occurred when most of the damage had already been done to OT’s share price. But again, if shareholders had bailed when the first signs emerged, they could have salvaged something rather than next to nothing.

In February 2001, Tony Rogge came on board as CFO. Rogge was an old chum of former chairman Graham Reaney when they were at AAPT together.

Rogge quickly ascended to the role of CEO (by June 2001) after Passlow resigned from that post.

But by November 2001, both Rogge and Reaney were gone altogether.

Colin Chandler took over as a director and as the new Chief Executive Officer in November 2001, but he’s now gone as well, pulling the pin just a couple of weeks prior to the AGM.

We had the almost comical situation of Chandler’s MD report to shareholders in the annual report, but no Chandler! He talks about how the company’s people and technology “positions us well to turn our vision into a reality” – a pity he won’t be there when that reality comes into being!

Passlow took over as interim chairman in November 2001, a role he has retained, and is now also CEO and company secretary.

The wife and kids won’t be seeing too much of Passlow over the next few weeks.

So come AGM time, we had only two directors front the shareholders – Passlow and Terry Cuthbertson. Interestingly, there was no indication given as to whether new directors would be filling the vacancies.

One suspects there won’t be too many candidates putting their hands in the air for this gig.

Where to for Open Telecommunications?

Undoubtedly, OT shareholders will be anxiously awaiting this “expert’s report” into the company’s health that Passlow cited on numerous occasions as the reason for him not being able to make any forward-looking statements.

Initially, I got the impression from Passlow that this was going to be a comprehensive review into the company’s operations. When a shareholder questioned him about how much this Deloittes report was going to cost, Passlow tempered expectations considerably, saying it would cost in the “thousands” and definitely not the tens of thousands.

If that’s the case, there will not be a lot of meat in the report.

Passlow was vague in detailing what it would achieve, saying that it would be more of a report card on the company’s strategy. Deloittes would give them a tick if they thought OT was on the right track, or if not, would suggest ways to improve.

Later in the meeting, he said that the report was started the previous week and would be finalised later this week.

If that’s the case, then one wonders whether even Deloittes’ finest will be able to come up with anything of substance!

Frankly, with the company in a wretched state, there’s no way this report will be the panacea for OT’s ills. The company certainly didn’t make out that that was the case, and amongst the shareholders the mood seemed to be of resignation that their investment is pretty much a write-off and any improvement would be modest and a long time coming.

Passlow said the company has downsized to suit the shrunk market, going from some 600 staff to 300. He says they can live within their means given their existing customer base, but the use of telephones is increasing and if OT’s customers’ businesses are growing, there is hope for OT.

His first aim is simply to “survive”, and then after that to try to ride on the growth which in his view will inevitably occur.

Despite the grim-faced cautious optimism of Passlow at the AGM, Dr Crullers fears this company is terminally ill.

It’s hemorrhaging cash (although Passlow was at pains to point out this has been ameliorated by recent cost cutting), half of its assets are in receivables (and given the vulnerability of the telecoms sector, significant bad debt write downs are more a probability than a possibility), and despite shareholders approving future capital raisings of up to $10 million, who would take up the opportunity?

There might be some adventurous speculators out there, but OT will need to be lucky to get anyone else on board after its chequered history.

Nice looking phone

It was a slightly different story at Hutchison Telecoms’ AGM.

Hutchison, of course, are behind the Orange mobile phone brand and hence responsible for those annoying or brilliantly innovative (depending on your point of view) “18 cents for 30 seconds – gee that’s cheap” ads that crop up in every third ad break on the idiot box.

They too have copped a caning on the stock market, almost hitting $6 back in March 2000. A little over a year later and they were trading as low as 11 cents, but have recovered slightly to be around 40 cents over recent months.

In 2001 they racked up a loss of almost $137 million, a disappointing blowout after their 2000 loss of $93 million.

Still, they would be under no illusion that it will take a few years to turn a profit from their mobile phone business.

And the signs indicate that the worst might be behind them, with the EBITDA loss for the second half of 2001 less than half of what it was for the first half of 2001. Also, their “subscriber acquisition costs” (the average cost of signing up a new customer, in effect) was halved in the second half of 2001 by cutting such costs as handset subsidies.

Most importantly, subscriber numbers continue to grow steadily in absolute terms, with almost 200,000 customers at the end of 2001, starting from a base of just over 10,000 in June 2000.

So those annoying (or brilliant) ads are having a positive impact, at least on customer numbers.

Most importantly, they have a definite plan and the moolah to make it happen. In this sense, Orange’s AGM contrasted starkly to OT’s. While the mood at Orange was generally sombre, reflecting the poor result, there was a sense of optimism and a workable plan to make the company profitable sooner rather than later.

Orange has identified the 3G business as a significant market opportunity, with CEO Kevin Russell in his address to shareholders saying that the company is flying in the face of its competitors, who think Orange have jumped into the 3G business too early.

What exactly the “3G” caper is all about is lost on this Luddite and no doubt was lost on the old timers present at Hutchison’s AGM.

Yes, Crullers knows it stands for “third generation” and will result in fantastic innovations, like mobile phones that put out the garbage, take the dog for a walk and read the kiddies a bedtime story and tuck them in of a night, but could somebody please explain to him the nuts and bolts of “3G” in idiot speak?

Given that Australians are notoriously slow to embrace new technology, the caution of Orange’s rivals is probably justified. But good on Orange for having a dip.

They certainly have the means to give it a fair old crack by virtue of a $600 million convertible rights issue to their parent, Hutchison Whampoa, which was approved by shareholders at their AGM.

So while it’s far too early to give Orange a clean bill of health, Dr Crullers says this patient is on the road to recover and with continuing treatment and recuperation can look forward to good health. But it will take time.

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Peter Fray
Peter Fray
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