Media tycoons angry at One.Tel fiasco

One.Tel administrator Steve Sherman told a press conference it would be "business as usual" for the failed telco

By CNN's Geoff Hiscock
Asia business editor

SYDNEY, Australia -- Junior Australian telco One.Tel collapsed into insolvency Wednesday morning, with key backers declaring they had been "profoundly misled" about the company's true financial position.

Publishing & Broadcasting chairman James Packer and News Ltd chairman Lachlan Murdoch said in a joint statement to the Australian Stock Exchange that "like all shareholders we are angry".

Packer is the son of Australia's richest man, Kerry Packer, while Murdoch is the son of News Corp chairman Rupert Murdoch. Both were on the board of One.Tel

Between them, the two media giants put $460 million (Aust$900 million) into One.Tel and were about to put more money into the company before due diligence revealed its parlous financial state.

One.Tel appointed voluntary administrators Wednesday morning after the directors decided the company was insolvent and that a planned capital raising of $69 million (A$132 million) would not be enough to save it.

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Joint administrator Steve Sherman of Ferriers Hodgson told a press conference Wednesday afternoon the total cash shortfall was more than $156 million ($A300 million). The company had debts in excess of $93 million (A$180 million).

He said the biggest creditors were Lucent Technologies and Australia's two biggest telcos, Telstra and Cable & Wireless Optus.

PBL and News between them hold a 41 percent stake, while One.Tel founders Jodee Rich and Brad Keeling hold 36 percent.

Rich, Keeling forced to step down

News Ltd chairman Lachlan Murdoch and fellow director, PBL chairman James Packer, say they were misled on finances

Rich and Keeling were forced to step down as joint chief executive officers on May 17, when PBL and News said they would underwrite the $69 million capital raising and take a more direct management role.

As late as last month, Rich was assuring investors at a telecommunications conference in Sydney that One.Tel would have $37 million in the bank by June 30.

But the marketing hype masked a deteriorating cash flow. The due diligence process as part of the capital raising showed a massive gap in the company's finances.

Problems with billing systems, the heavy cost of spectrum and network building, and what looks to be poor management meant that the company's losses were increasing, not being pared back, as Rich claimed.

'Profoundly misled' as to company's financial position

"We have been profoundly misled as to the true financial position of the company," Packer and Murdoch said in their statement to the ASX.They said they would look at all remedies available to them.

PBL and News took their stakes in One.Tel in February 1999, with Murdoch saying at the time that News was confident One.Tel had the products and the management to become a major player in global telecommunications.

Sherman said that the administrators' report to creditors would, as a matter of course, look at the activities of the directors and matters such as preferential payments. He said he had spoken briefly to Keeling but not Rich. He had also had discussions with Packer and Murdoch.

Trading in One.Tel shares was suspended on Monday morning. The shares last traded at A16c on Friday -- a far cry from their November 1999 high of A$2.84.

One.Tel's statement to the ASX said the company's auditors, Ernst & Young, had found from their due diligence investigations that the capital raising would not be enough to keep the company solvent.

"The renounceable rights issue to raise A$132 million can therefore not proceed."

Sherman said it would be "business as usual" for One.Tel's 1400 staff and 1 million customers while a review of its operations was conducted. He will report to creditors in the next four weeks.

Discussions with major creditors

He said One.Tel would continue to trade as a going concern while discussions were held with major creditors Telstra, Optus and Lucent Technologies, which has been building One.Tel's national mobile network.

Lucent, which has just terminated its merger talks with France's Alcatel, provided more than $500 million in vendor finance for One.Tel's national network and spectrum purchases.

Under the generous terms of that deal, there was no interest payable until 2003 and no principal repayable until 2006.

But with One.Tel now in administration, the full amount becomes due immediately. Sherman agreed that this scenario was a possibility.

This means Lucent could end up owning a key slice of One.Tel's assets.

One.Tel was set up by Rich, Keeling and Sydney entrepreneur Rodney Adler in 1995. The company claims almost 1 million customers in Australia (mobile, Internet and fixed-line) and 2.6 million worldwide. Its operations outside Australia include Hong Kong, the U.K., Netherlands, France, Germany and Switzerland.