Telecom New Zealand Ponders Structural Separation, Might Become a Much Smaller Company

By Gary Kim, Contributing Editor

Telecom Corp., New Zealand's incumbent phone company is investigating splitting itself into separate retail and wholesale companies ('structural separation') in order to take part in a $1 billion government high-speed Internet network, according to Reuters (News - Alert). Telecom New Zealand has been operating for several years under a 'functional' separation regime that has wholesale operations segregated from retail operations, much as BT operates in the United Kingdom.

A structural separation, though, would lead to Telecom New Zealand (News - Alert) becoming a much-smaller company, as it would give up all ownership of all physical assets and become an 'over the top' retail provider. How much smaller Telecom New Zealand might become is not precisely clear, but observers suggest it would have half to one third of its current total income.

Competitors of course would like that, though Telecom New Zealand would not, and, apparently, investors in the company are not so enthusiastic, either.

The government plan, and Telecom Corp.'s potential split, have hammered the company's equity price. Shares in Telecom, a former state-owned monopoly and New Zealand's second largest listed company, touched a record low of NZ$1.96 (about $1.92 in U.S. funds).

So far this year the stock, the second biggest listed New Zealand stock by capitalization, has fallen 22 percent against a 4.8 percent fall for the broader benchmark NZX-50 index .NZ50.

'The Government's initiative will fundamentally reshape the structure of the entire telecommunications industry in New Zealand and Telecom is therefore undertaking a thorough assessment of the merits of structural separation,' Telecom Chief Executive Paul Reynolds said. 

Analysts have speculated whether Telecom would look at a separation of retail and wholesale operations from the part that runs the network in order to bid for work under the NZ$1.5 billion government plan to build a new broadband network that would operate as a wholesale provider of services to separate retail providers.

The government is expected name its shortlist of bidders to build regional fiber networks within the next few weeks, with successful companies named in the third quarter.

Telecom's market value is about NZ$3.8 billion, with its network arm, Chorus, expected to account for between half and two-thirds of that.

The whole point of separating wholesale from retail operations is to allow Telecom New Zealand's network operations to form the backbone of the new national network.

Telecom was forced by the government in 2006 to 'functionally' split its network, wholesale and retail arms into separate companies to provide services to smaller rivals on the same terms and prices as it does to Telecom's retail business. The new step would completely separate the assets, with Telecom divesting all wholesale and network operations and operating as a retail-only company, buying network services from the entirely-separate wholesale company.

In Australia the dominant phone company Telstra Corp. (News - Alert) also is in negotiations with the government about a similar plan.

In the U.S. market there has been a small amount of talk, though not much over the last decade, in structural separation. But such moves are quite rate in the communications business and have, up to this point, resulted from determined government pressure. The salient exception is Rochester Telephone's voluntary embrace of an 'open market' plan that freed that company to expand into the long distance business.

As much as some policy advocates might prefer it, it does not appear that the requisite amount of government pressure could now be brought to bear to force such a structural separation in the U.S. market.

(source: http://australia.tmcnet.com/topics/newzealand/articles/86427-telecom-new-zealand-ponders-structural-separation-might-become.htm)