Market moody over Telstra 'adventure'

The market showed a lack of enthusiasm for Telstra yesterday after the telco announced its multibillion-dollar deal with Hong Kong internet company Pacific Century CyberWorks (PCCW) on Wednesday.

The company's shares opened in the red, and the stock was down 23 cents to $7.41at close of trade.

Concerns over the amount of cash the company has to hand over as part of the deal -- approximately $5 billion for starters -- have seen international ratings company Moody's put Telstra on review for a possible downgrade. New York-based Moody's said it had put Telstra's "senior unsecured ratings" on review for a possible downgrade following Wednesday's announcement.

Moody's said it does not expect Telstra's Australasian operations to be adversely affected by the agreement with PCCW. However, the agency said its review would focus on: the extent to which exposure to the Hong Kong-based company would affect Telstra's risk profile; the likely strategic and cash flow benefits that may emerge over time from the investment; the impact on Telstra's debt servicing ability; and any likely further investments.

Meanwhile, the head of Ernst & Young Asia-Pacific communications consulting, John Edwards, said the deal was "exactly" what Telstra needed. While Edwards admitted that the deal was "adventurous", he said it placed Telstra in the "right space", in a region that was "potentially the biggest internet market in the world" in the future.

Edwards said the Asia-Pacific region was an essential market for Telstra to be in, and suggested that he would be very surprised if the telco didn't enter into a number of other deals in the region. "Telstra in general, and the board, have recognised that playing a strong role in the region is the next thing the company must accomplish," Edwards said.

Wednesday's deal will see the companies combine some of their assets to establish a mobile telecommunications company and a global IP backbone.

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