Forum Archive Index - January 2001

["Douglas Stewart" <dougstew@ihug.co.nz>]

Regarding the commoditisation of telecommunications, we should keep a couple of points in mind.  Firstly the belief that anyone can come along and compete with major telcos has taken a blow with ngl's announcement that they are packing their bags.  Secondly, the business that serious telcos are trying to capture right now because of future communications trends is mobile business - not fixed line.  New Zealand has just two mobile companies - Tel and Vod - so there is no commoditisation.  Their combined market penetration is around 46%, using the most recent figures.  This compares with a market penetration in the UK of 69% and even higher penetration in some other European countries.  There is still much growth available in NZ - hence Vod are relentlessly marketing themselves.  It's no surprise that the majority of Tel's recently increased marketing budget is also aimed at capturing new mobile customers. 

 

Tel's Australian strategy is also to capture mobile share - via AAPT and now perhaps other assets.  (BTW I see that DoCoMo are bidding US$10 billion for a 16% stake in AT&T and that's why they have withdrawn from bidding for C&W Optus.)

 

Whether Tel will buy either C&W Optus or Vod mobile assetts in Australia remains to be seen.  Whether they proceed via a rights issue also remains to be seen.  I think a rights issue is highly unlikely and that TEL will use the banks and possibly (as European telcos are doing now) raise some of the cash by issuing bonds here and in Australia.

 

In the unlikely event that there is a rights isssue, investors need to consider its purpose .  Personally, if I was buying a business for myself, I'd be very happy to purchase Vodafone's Australian business or C&W Optus's business.  Those are the businesses that investors would be buying into in a TEL rights issue. I would draw a distinction between such a rights issue and the recent rights issues we've seen.  The forests rights issue bought the purchasers nothing.  Its only purpose was to keep the company afloat by paying off debt.  The AIR issue was to buy an Australian airline (probably a good move) with an ageing fleet (probably a bad move.)  The Australian mobile business is not exactly ageing - it's high growth.

 

Finally large takeovers are not necessarily bad things - some do badly, some are successful.  The chances of success increase if the takeover, in the words of Peter Lynch, is not a "diworsification".  For example BP has succesfully taken over other (larger) oil companies twice now.  I'm not sure what is meant by "still digesting with difficulty its meal of AAPT."  Telecom's takeover of AAPT has, as far as I can see, gone as forecast by Telecom.

 

What should be of real concern to Telecom shareholders is if it was content to stand still.  The fact that it is pursuing high value, "non-commoditised," mobile customers here and in Australia is strategically sound.