One.Tel collapse: how a telco burned through a billion

By the time administrators walked into One.Tel's Sydney offices in May 2001, the company had approximately 580,000 subscribers, offices across multiple countries and a share price that had fallen from a peak of around $2.60 to effectively nothing. It had also burned through somewhere in the vicinity of a billion dollars. The One.Tel collapse remains one of the more instructive files in Australian corporate history: a case study in how ambition, governance failures and a brutal capital market can converge on a single, very loud bang. The One.Tel entry on Wikipedia gives a short outline of the company, and what follows is the longer version.

The founding and the early pitch

Jodee Rich and Brad Keeling founded One.Tel in Sydney in 1995. Rich had previously built and sold Imagineering, a computer reseller that collapsed in 1992 leaving creditors unpaid, a fact that would loom large in later proceedings. He came to One.Tel with a particular talent for selling a vision. The pitch was simple and, for its era, genuinely compelling: a reseller model that would offer cheap calls by riding on top of the existing Telstra and Optus networks rather than building infrastructure from scratch.

The appeal of that model is easy to see. A reseller buys network capacity wholesale and sells it on at retail, so it avoids the huge upfront cost of towers, cables and exchanges. The catch is that the margin between the wholesale price and the retail price is thin, and the reseller depends entirely on its supplier. Growth has to be paid for with marketing and customer acquisition, and if the cost of winning a customer is higher than the profit that customer generates, faster growth simply means faster losses.

It worked, for a while. Customer numbers grew quickly. The company listed on the ASX in 1997. And then, as the late 1990s technology boom hit full stride, the ambitions escalated dramatically.

When Packer and Murdoch came in

The pivotal moment in One.Tel's story, the one that transformed it from a moderately interesting telco into a front-page phenomenon, came in 1999 when James Packer's PBL and Lachlan Murdoch's News Limited each invested around $439 million for roughly equal stakes of approximately 17 per cent each. The total injection from the two families was reported at the time to be roughly $1 billion across various tranches and commitments. For the wider background on one of those families, see our piece on News Limited's origins and growth.

Both were, by any measure, sophisticated investors. Both had advisers. And yet, according to evidence and findings that emerged from years of subsequent litigation, the board oversight of what management was actually doing with the money was, to put it charitably, inadequate.

That is the uncomfortable part. A big-name shareholder can create a sense of safety, for staff, for suppliers and for other investors, that the underlying numbers do not justify. Directors are meant to test management's figures, not simply to admire the register. I'd argue that the presence of two famous names on the share register made everyone slightly less inclined to ask the dull questions about cash.

One.Tel moved aggressively into building its own mobile network in Europe, specifically acquiring spectrum licences in France and the Netherlands, and expanded its Australian operations substantially. These were capital-intensive bets at a moment when the market was beginning to turn.

The unravelling

By late 2000, the cash was running out faster than anyone on the board appeared to appreciate, or was being told. One.Tel's management accounts, as later examined in detail by liquidators and courts, showed the company was burning cash at a rate that made its survival trajectory very short. The European operations in particular were haemorrhaging money.

"Burn rate" is the plain term for this: how much cash a business consumes each month beyond what it earns. A high burn rate is not fatal by itself while investors keep writing cheques. It becomes fatal when the next cheque does not arrive, because the business has no cushion left, and the board needs reliable, current figures to see that moment coming.

In the first months of 2001, Rich and Keeling sought additional capital injections from PBL and News. A further rescue package was being negotiated right up until the end. On 17 May 2001, having failed to secure the funds needed to continue operating, One.Tel appointed voluntary administrators. Keeling resigned that day. Rich resigned shortly after.

How the administration worked

Voluntary administration is the process under which a company's directors hand control to an independent registered professional, who takes a short period to assess the business and report to creditors. The administrator can keep trading, sell the business, or recommend a deal with creditors. If none of that works, the company usually moves into liquidation. The corporate regulator, the Australian Securities and Investments Commission, oversees the registration of insolvency practitioners and the conduct of companies and directors.

Steve Sherman and Peter Walker of Ferrier Hodgson were appointed as administrators. Their subsequent reports to creditors, documents I'd recommend anyone interested in this period read in full, painted a picture of a company whose financial reporting to its board had been, at minimum, significantly misleading. The administrators found that the company had been insolvent, or near insolvent, for some time before the appointment.

Why does that finding matter? Because directors who allow a company to keep incurring debts while it cannot pay them as they fall due can face personal exposure under the corporations legislation. Establishing precisely when a company became insolvent is therefore one of the hardest and most contested questions in any collapse, and it sits at the centre of what came next.

The One.Tel collapse by the numbers

Creditors were owed money across a wide range of claims. Telstra, as One.Tel's main network supplier, was among the largest creditors. Staff were owed entitlements. Customers had prepaid amounts outstanding. The total deficiency to creditors was reported at around $600 million, though the full picture of losses across shareholders, including the hundreds of millions put in by the Packer and Murdoch interests, pushed the total value destruction well past a billion dollars.

The distinction between those two figures is worth keeping straight. A deficiency to creditors measures what the company owed against what it could pay. Value destruction is a broader idea that adds in the money shareholders put up and lost. Mixing the two is a common mistake when people quote the One.Tel figures, and it explains why different sources give different headline numbers.

For ordinary shareholders, the loss was total. Shareholders rank last in the queue when a company fails, behind secured lenders, employees and unsecured creditors, so a collapse of this kind rarely leaves anything for them. For the two family companies, it was a significant and very public embarrassment. James Packer later described the investment as the worst decision of his business life. That quote has been repeated so often it has become almost rote, but it deserves a pause: this was a man with access to resources and advisers that most investors can only imagine, and he still ended up watching the better part of half a billion dollars disappear.

The ASIC proceedings and the long litigation

The Australian Securities and Investments Commission launched civil penalty proceedings against Rich and Keeling, alleging, among other things, that they had breached their duties as directors by failing to prevent One.Tel from trading while insolvent and by providing false or misleading information to the board.

ASIC also brought proceedings against Lachlan Murdoch and James Packer as non-executive directors, alleging they had breached their duties in approving a further capital injection in early 2001 without adequate information.

What followed was one of the longest and most expensive pieces of corporate litigation in Australian history. The ASIC proceedings against Rich and Keeling alone took years to resolve. In 2009, after a trial that ran for hundreds of days, Justice Robert Austin of the NSW Supreme Court handed down a judgment running to thousands of pages. The court dismissed most of ASIC's claims against Rich. The findings were, in significant respects, adverse to ASIC's case, though the judgment itself is a complex document and the characterisation of its outcomes was contested by different parties.

The proceedings against Lachlan Murdoch and James Packer were settled in 2006 before any findings were made. Under the terms of the settlement, which were reported at the time but the precise terms of which the parties did not fully disclose, both men made payments without admissions of liability. ASIC accepted the settlements.

Separately, PBL brought civil proceedings against Rich and others. That litigation also ran for years and generated its own body of contested findings and settlements. For a comparison with another matter that dragged through the courts, see our account of the longest litigation in Australian corporate history.

What the One.Tel case established, and didn't

Practitioners in insolvency and corporate governance still refer to One.Tel, and not only because of its scale. The case raised questions about the duties of non-executive directors that remain genuinely unsettled in Australian law: how much can a board member rely on management representations? When does inadequate information become a breach of duty? Justice Austin's judgment in the Rich proceedings, whatever one thinks of its outcome, is a serious attempt to work through those questions in the context of a fast-moving technology company in a volatile market.

The general principle is that directors may rely on information from management in good faith, but reliance is not a blanket excuse. A director who has reason to doubt the numbers, or who never asks for them, is on weaker ground. Where the line falls in a particular case depends on the facts, which is exactly why this judgment is still read.

The case also illustrated the limits of ASIC's litigation capacity. The regulator committed enormous resources to the proceedings against Rich over nearly a decade, and the mixed results prompted real debate, some of it pointed, about whether the strategy had been the right one. I'll admit I find it hard to look at the One.Tel file without thinking that the most important governance failures probably occurred earlier, and further up, than the proceedings ultimately focused. Other collapses raised similar questions about who was watching, as in our look at the compensation scandal that changed Australian corporate law.

The European spectrum and the wreckage abroad

One aspect of the collapse that received less sustained attention than the domestic drama was the fate of the European spectrum licences. One.Tel had acquired 3G spectrum in France and the Netherlands at the height of the European telecoms boom, when such licences were being valued at extraordinary sums. By the time the company collapsed, those licences were essentially worthless. The broader European 3G bubble had deflated across the entire sector, and One.Tel was hardly alone in writing off enormous sums on spectrum assets.

Spectrum is the slice of radio frequency that a mobile operator needs a licence to use, and governments typically sell it by auction or similar process. Because supply is fixed and bidders fear missing out, prices can climb well beyond what the eventual revenue supports. A licence is also only the entry ticket: the operator still has to pay for the network built on top of it.

That is the real sting here. The scale of the European commitment, entered into without the infrastructure or the balance sheet to support it, was a significant accelerant on the path to insolvency.

What came after

Jodee Rich, despite the years of litigation, remained an active figure in Australian technology circles. He subsequently founded other ventures. Brad Keeling largely withdrew from public life. Lachlan Murdoch and James Packer went on to rebuild and, in Packer's case, ultimately sell down Crown Resorts, which generated its own spectacular regulatory reckoning years later, a story covered elsewhere in our Great Australian Collapses archive. Readers who want a different kind of failure, where retail investors were left as unsecured creditors, can read about how a stock-lending firm collapsed.

One.Tel's subscribers were absorbed by other carriers. The brand disappeared. The Sydney office on Clarence Street, where so much money had passed through in such a short time, became someone else's problem.

What endures, beyond the case law and the administrator reports, is a fairly clean lesson: having prominent, wealthy shareholders on your register does not substitute for governance, and a fast-growing customer base does not substitute for a business model that actually generates cash. Both of those things were true in 1999. Both of them are still true. The names change; the balance sheet arithmetic doesn't.

— Ray Petrakis, Corporate Collapses & Insolvency, Melbourne