Plessey set for major gains with R600 million venture in Australia
Plessey Corporation has gained a major foothold in Australia with the agreement to create a joint venture with Telstra Corporation, the Australian telecommunications giant. The JV with Telstra, a highly rated, partially privatised company whose share price has performed well on the Australian Stock Exchange since listing in November, creates an opportunity for Plessey to expand rapidly its existing Sydney-based subsidiary into an operation generating significant operating profits when compared with those of the South African businesses. The JV will be called Plestel, a Plessey-Telstra alliance. It will target small and medium sized businesses and could boost total Plessey sales to above R2bn and have a positive impact on earnings for the current year. Plessey reported headline earnings of 18,2 cents a share (15,8 cents) for the six months to September 1997, with the directors confident of improved results in the second half and of a real increase in headline earnings for the year. In 1997 these were 26,9c a share. The Plessey-Telstra alliance company, serving 100 000 customers, employing 850 people throughout Australia and with annual revenue of around R600 million a year from sales, rental, installation and maintenance of small key systems and PABXs will be operational from mid-year. It will propel the base Plessey set up at the beginning of 1997, with the acquisition of three electronic divisions from AWA Ltd and the establishment of Plessey Asia Pacific, into an R800 million-plus a year business, with substantial growth prospects. Huge Customer Base The JV`s huge customer base presents a special opportunity for Plessey to market new products. These include new computer telephony integration products (CTI) which Plessey will launch in Australia. Other marketing opportunities such as with PABXs will also open up for Plessey through its Plestel channel. Plessey two A 74% owned subsidiary, Plessey Asia Pacific and Telstra began discussions late last year to form a joint venture involving Telstra`s Commander Small Business Systems business. Due diligence investigations by both parties are complete but the transaction remains subject to regulatory approvals and agreement on final documentation. Because of these requirements and several transitional matters, completion is not expected before July 1998. Telstra`s SBS business has more than 50% of the Australian market in its segment. Much of its annual revenue is steady as it comes from rentals, maintenance and support. Margins are reasonable so that the business can be expected to contribute significant earnings to Plessey Corporation once it has settled down and the transition costs have declined. Growth and further cost reductions will cause the business to contribute significantly in future years. Plessey Asia Pacific, which was set up as a bridgehead from which to pursue other opportunities, won the business against 20 other tenders to Telstra, including international competitors. Plestel will be 70% owned by Plessey Asia Pacific with the balance held by Telstra. This means Plessey Corporation will own 52% of Plestel. It will have the use of Telstra brand names, such as Telstra Commander. Positive Cash Flow The purchase price for the acquisition will depend on the final value of net tangible assets, but could be about A$105 million (R350 million). It will largely be funded by loans raised in Australia. This is possible on account of the positive cash flow of the business. No dilution will be necessary in Plessey Corporation shares but Plessey will use about R50 million from its South African cash resources and Plessey Asia Pacific will also contribute some A$10 million from its cash resources. Plessey Asia Pacific which has carefully targeted markets outside Australia, had significant cash resources at March 31 and anticipates profits in excess of A$2.0 million for the year to March 31. Its revenue stems from Australian sales and business in markets not affected by economic decline such as China, Singapore, Hong Kong, Vietnam and the Philippines. Plessey three John Temple, chief executive of Plessey Corporation, will relinquish most of his South African responsibilities to be the executive chairman of the new company, with executive management led by John Vaz, the current MD of Plessey Asia Pacific.