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New Telecom will be takeover target [Waikato Times (New Zealand)](Waikato Times (New Zealand) Via Acquire Media NewsEdge) The forthcoming split of Telecom could be viewed in two opposing ways. It could be seen as a defeat; a knockout blow landed on the business by a heavy-handed regulatory regime. Or it could be treated as an opportunity. Chalkie reckons the split provides a big chance for Telecom to shine. But he also thinks there is a strong possibility the company won't react quickly enough and may end up being swallowed by an overseas predator. The plan is for Telecom to be split into two separate companies, a "new" Telecom and "new" Chorus. The network arm, Chorus, has existed as a subsidiary of Telecom since 2008 after previous government regulations drove an "operational separation" of various Telecom activities. The forthcoming severance is the next step - a "structural" separation. After it, new Telecom's operations will include: fixed-line phone services, broadband, mobile operations, Gen-i - which is Telecom's information and communication technology arm servicing large businesses, Australian telco AAPT and 50 per cent ownership of the Southern Cross undersea cable. Chorus will own and operate nationwide fixed-line telecommunications network infrastructure. This will include the existing copper network and about 70 per cent of the government- initiated ultra-fast broadband (UFB) fibre network to be built by the end of 2019. Chorus will receive $929 million of the $1.3 billion the state is contributing to the project. Chorus' biggest customer will be Telecom. To take part in the UFB project, Telecom had to agree to separate. The split may cost up to $150m, mostly borne by new Telecom. In theory, the UFB deal with the Government could still be torpedoed. The separation first requires approval from holders of about $540m worth of Telecom bonds at a special meeting on September 30. Then, at the Telecom annual meeting on October 26, the split proposal needs a 75 per cent "yes" vote from the company's 38,000 shareholders. It would, however, be a massive surprise if the proposal did not get approval. All going as planned then, new Telecom and new Chorus should make their debuts as completely separate companies on the stockmarkets here and in Australia before the end of the year. The new Chorus will in many ways be like the old Telecom. It will have restrictions on foreign ownership, close ties with the Government and be heavily regulated. It is estimated that Chorus will have assets of about $2.4b and net debt of $1.7b. Independent adviser Grant Samuel estimates operating earnings for Chorus of about $650m for the full year to June 2012. Chalkie reckons earnings will be solid and consistent, rather than spectacular, and the dividends - starting with an expected 25-cent-a-share payout in 2012 - will likely be similarly solid. Chorus will be what was once described as a bottom-drawer share; the investor would put the share certificates into a bottom drawer, forget about them, and collect the dividends. Chalkie is more interested in the new Telecom. Till now, there have been government restrictions over the potential takeover of, and foreign ownership levels in, Telecom. These will be lifted from the company, along with a host of restrictive operating regulations. For the first time since its sale by the Government in 1990, Telecom is free. It will have estimated assets of about $4b and relatively small borrowings, with net debt of about $750m. Grant Samuel estimates operating earnings of about $1.15b in the 2012 financial year. The first thing Chalkie would do is throw away the Telecom name. Call it something, anything, else. The Telecom moniker has massive historical baggage. New Telecom will be well placed, despite the loss of the solid backup revenues that have been provided till now by the Chorus assets. Telecom holds 53 per cent of the broadband market, 66 per cent of the traditional fixed-line telephone market, and 40 per cent of mobile - in which it is No 2 to Vodafone with a 46 per cent share. There would seem an obvious chance for Telecom, with its newly reduced debt levels and freedom from regulation, to really push into the mobile market. As mobile technology improves, there will be more opportunities to get customers to increasingly use the internet over mobile networks. Telecom could ultimately take business away from Chorus and its new UFB network, particularly if mobile networks are eventually able to sustain faster internet download capacities. Why couldn't Telecom then look to expand, by, for example, buying into overseas mobile companies? Financially it would be strong enough to do so. If it wanted or needed to access extra cash, it could offload some of its existing operations. The remainder of its Australian telco subsidiary AAPT - a multibillion-dollar loss- making investment made in 1999 - could be sold, if anyone would buy it. Maybe also, if Telecom focused heavily on mobile, it could look at offloading all or parts of Gen-i, which services its big business clients. Gen-i has annual operating earnings of more than $200m, so a sale price of $1b or more would not be out of the question. The problem is, will new Telecom be eyeing these sorts of opportunities from day one? Or, instead, will it be looking over its shoulder at what it has lost with the split-off of Chorus? The company might not have long to aggressively pursue new opportunities, make a mark for itself, and build its share price to a level that ensures continued independence for the company. It will have a wide open share register. Only two institutional investors currently hold stakes in excess of 5 per cent. Grant Samuel, the independent adviser, estimate a potential price range for the new Telecom stock when it starts trading in late November of between $1.73 and $2.33. At the top price, the whole company would be worth about $4.5b - cheap by international telecommunications company standards. It would be entirely feasible for some party to buy a 19.9 per cent stake - which is the most that could be acquired without making a takeover bid - for about $1b. That would be back-pocket stuff for some parties. What about Telstra from across the Tasman making such an investment? Or Singapore's SingTel? They could achieve significant levels of influence at Telecom with just a 19.9 per cent holding and then possibly move to a full takeover later. Another possibility would be a full takeover bid straight away, perhaps from private equity operators. For example, five large multinational private equity firms got together in 2005 and bought control of Denmark's largest telco, TDC. Because of such potential threats to its independence, new Telecom doesn't have the luxury of simply easing its way into existence. It will need to get up and running as fast as possible. While Telecom may see it as an advantage that existing chief executive Paul Reynolds is staying on through the separation transition period, Chalkie doesn't. Reynolds plans to leave in 2012, when a new chief executive is appointed. This means there will be an inevitable vacuum in strategic decision-making at the top in Telecom during its crucial early days and months. Chalkie reckons the set-up of new Telecom, including a very conservatively selected board, looks based around a safety-first attitude. Defence may be the initial instinct. "What we have, we hold." That is the wrong attitude. Freed from regulatory constraints, the new company could be a powerhouse. But Chalkie is prepared to wager that overseas parties will see the opportunities before Telecom itself does and will strike, sooner rather than later, on the New Zealand company. Kiwi shareholders, as always, would be the losers. zDavid Hargreaves is a former Fairfax business reporter and columnist now writing freelance. Chalkie's name is derived from the people who used to "chalk" up the share prices on trading floors before the market went electronic. (c) 2011 ProQuest Information and Learning Company; All Rights Reserved. |