Telstra strong enough to take over Telecom - analysts

By NZPA

Wednesday 6th November 2002

Australian media speculation that Telecom could be a takeover target have been echoed by some analysts.

The Australian newspaper has speculated that Telstra is the most likely buyer of Telecom New Zealand, after the New Zealand company admitted yesterday that its first quarter profit forecasts would fall short by up to 15 percent.

As a result, Telecom was savaged, losing 50c or almost 10 percent of its value, although it recovered almost 4 percent today.

Telecom has also had its interconnnection fees trimmed in the first of three vital decisions from the Telecommunications Commissioner this week.

Analysts are watching to see if Telecom's market strength as an incumbent in New Zealand will fare under the new regulator.

Simon Botherway, of Brook Asset Management, said telecommunication companies had taken such a battering that many of them were now "quite good value," and that Telstra could be a strong takeover contender for Telecom if it chose to be.

"Telstra have a very strong balance sheet. They have not been successful in terms of their investing activities in the Asian region and obviously an acquisition close to home would be greeted with a great deal more enthusiasm than something in the broader Asian region."

Mr Botherway told National Radio that competition rules were an issue, given that Telstra owned more than half of New Zealand's second biggest telco, TelstraClear.

Telstra would be looking at the way competition regulators handled the Air New Zealand-Qantas talks and also negotiations between pay TV operator Foxtel and telco Optus in Australia, he said.

Australian telecommunications consultant Paul Budde agreed Telstra was the logical company to take over Telecom because it was the only company in the region that was large enough.

But he doubted it would happen within three or four years.

"If the situation deteriorates and the telecommunications infrastructure is under threat, and there is not sufficient money coming into the market to provide a first-class telecommunications network... then you will get political pressure that could result in the foreign ownership laws that could allow Telstra to play a much bigger role in the market."

Already Telecom was beginning to talk about the cost of upgrading its network and decisions which might affects its ability to invest, he said.

Telecom's poorly performing Australian arm, AAPT, had retreated to a niche market and because it was not an incumbent like Telecom New Zealand, the two companies did not have the same synergies.

Analysts are awaiting Telecom's first quarter results next week, where they hope to get an explanation for the lower profit forecast.

Mr Botherway said that while the market was in the dark, investors had been "prepared to shoot first rather than ask questions".

He said the next step for Telecom was to see what the telecommunications regulator decided about its universal service obligations, the "Kiwishare".

Under a new regime competitors will have to contribute to Telecom's losses in providing basic phone services to remote areas.

The Telecommunications Commissioner is expected to deliver draft decisions on that subject early next year, and on wholesale prices between Telecom and TelstraClear within the next few weeks.

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