Entwistle needs tough love at Telus

FABRICE TAYLOR The Globe and Mail

December 12, 2007

Telus Corp. hasn't exactly come a long way since they gave Darren Entwistle the keys to the corner suite in the salad days of 2000. The annualized return over his tenure works out to about 3.3 per cent. You'd have done better in government bonds.

That's not to say it's been a boring ride. Watching your stock nosedive from $44 to $6 in a year, then climb steadily to $65 over six years, then plummet back to $45 and counting in a few months is nothing short of exhilarating.

Tomorrow, when Telus gives its annual guidance, Mr. Entwistle will tell his shareholders what bounty they can expect next year. He didn't ask for advice, but we're going to give him some anyway: Come clean, admit things are tough and getting tougher, take your lumps and rebuild from there.

Investors are losing patience. Not only is the stock down 30 per cent from its highs, but it's quoted at a contemptuous 13 times earnings. Isn't this supposed to be a dividend growth story? Even Manitoba Tel fetches a higher price.

The damage seven years ago was a self-inflicted wound to the balance sheet in the form of the Clearnet acquisition for about twice the going rate. Wireless is at the root of the problem today as well. It's not quite the blunt force trauma of Clearnet, but the numbers look pretty bleak and are getting worse.

In the second quarter of 2006, Telus's year-over-year wireless revenue growth was 19 per cent. It has fallen relentlessly since, hitting 9.6 per cent in the third quarter of 2007. That's about half Rogers's, but still better than Bell.

However, considering Telus's stronghold in Western Canada, where everyone's moving because of its strong economy, that's not exactly reassuring. Again, MTS is outperforming Telus. And since investors pay higher multiples for higher growth, Telus's multiple, and stock price, are heading down. Given the trend, it's going to get worse: The growth rate is falling more and more by the quarter.

And that's not the only problem. The growth rate in average revenue per user, another crucial yardstick in wireless valuation, has been falling steadily and is now negative. Telus's market share of new postpaid subscribers is also starting to fall.

It's a little early to say this with conviction, but there are early signs that Bell, now run by George Cope, who built and sold Clearnet and ran Telus Mobility, is starting to make inroads against its rival. There is also word of notable defections from Telus to Bell Mobility (which Telus denies).

In short, bad. But it gets worse: Telus management has been underdelivering of late. Investors hate negative surprises but they are beginning to expect them. Telus lowered fourth-quarter guidance when it released its last set of numbers, but the stock keeps falling, suggesting the market thinks it might be even worse.

It's not like they don't have enough to worry about. Under the new spectrum rules, there will probably be a new wireless competitor in every major region by the end of next year. They'll have a relatively easy time of gaining market share. You don't want to head into that wind dragging a parachute.

If the trend is any indication, Telus should tell investors that 2008 is going to be weak year for revenue and earnings growth. It will also be a year of investment to turn around the numbers and protect market share. In other words, don't expect much.

But that's always hard for a CEO to do, especially when the stock is barely keeping its nostrils above water since he took over - and when he's taken out tens of millions of dollars in compensation notwithstanding that performance. Still, it's the smart thing to do.

So Darren: tell 'em the truth. You're in a spot of trouble. You're going to have to spend some money to get out of it. The market already suspects this anyway. Just confirm it. Maybe your stock gets hit a little harder. So what? It'll be worse if you disappoint again, so get it over with, churn your shareholder base a little and start fresh.

And avoid big acquisitions.

*****

Then and now - Summer, 2000 / Now
Book equity: (billion) $4.4 / $6.7
Debt: (billion) $1.7 / $4.5
Share price: $41.00 / $45.34
Latest quarterly EPS: $0.69 / 0.95*
Annualized dividend: $1.40 / $1.50

SOURCE: COMPANY REPORTS, THOMPSON