Telstra's Chinese Octave lowered by $138m

Stuart Corner
Thursday, 23 December 2010 09:15

IT Industry - Strategy

Telstra has taken a $138m write down on the value of its 67 percent stake in Chinese mobile content business, Octave, as a result of changes rules in China on the provision of WAP based mobile services.

Octave comprises ChinaM, a supplier of consumer mobile content, and Sharp Point, which provides technical services for China Mobile's central mobile music platform. Telstra acquired a 67 percent stake in the businesses in February 2009 for $259m. Its FY2010 results showed the carrying value of goodwill in the company at $116m, down from $159 million a year earlier. Goodwill on acquisition was $191m.

Announcing the write down, Telstra said it had "first highlighted a potential impact on the Octave business in August 2010 following regulatory rulings that were expected to constrain the Wireless Application Protocol (WAP) market in China."

However while it did warn of a potential writedown in its FY2010 annual report, it gave no specific reason, saying only that "As at 30 June 2010, the carrying value of our assets in the Octave Group were tested for impairment based on value in use. During fiscal 2010 there were significant changes in the regulatory environment in China in which the Octave Group operates. These changes are industry wide and it is not yet known with any certainty whether the changes are permanent or temporary, and it is uncertain as to whether or when these changes will be reversed.

"The future cash flow assumptions used in determining the recoverable amount of the Octave Group CGU incorporate our assessment of the risk that 50 percent of estimated future cash flows may not eventuate as a result of these regulatory changes. If this assumption is not correct and the future cash flows decline by a further three percent then the carrying value will equal the recoverable amount. Written confirmation is being sought from authorities in China as to the likely regulatory position as well as with the relevant contracting party regarding future possibilities."

It now says that the impact of the rulings has been clarified and a as a result it has updated the Octave business plan "with the result it is expected to record an impairment charge against the carrying value of the Octave investments of approximately $138 million."

The Octave write-down will be recorded as an impairment in the results for the half-year ended December 2010. Telstra says the decision will have no impact on its guidance "which explicitly excluded asset impairments and proceeds from asset sales."

The company said it remains focused on its investments in Asia, where, "In Hong Kong, Telstra continues to see positive momentum in the mobiles business, CSL, with strong uptake of smartphones and the recently-announced launch of one of the world's first LTE networks. [And] in China, Sequel, Telstra's China online verticals business, and LMobile, Telstra's China mobile content assets, continue to perform well."