Broadband scene changing in New Zealand

JNEW ZEALAND: Telecom Corp of New Zealand is debating whether to split itself in order to participate in the government's $1 billion high speed Internet network.

The government is part-funding a nationwide fibre-optic phone and Internet network as it aims to boost the widespread uptake of broadband to drive economic development.

The proposal stipulates that network builders and operators cannot also be retailers of telecom services. This prevents Telecom, a former state-owned enterprise which dominates the local market, from bidding to build the network.

Telecom is mulling whether to separate its wholesale and retail operations from its network arm, while simultaneously talking to the government about easing its required investment in the copper network under previous regulations.

Hit by the uncertainty, Telecom's shares have lost 24 per cent this year versus a six per cent drop in the top 50 index .NZ50.

Following are scenarios on what might happen next.

TELECOM SPLITS OR DEMERGES NETWORK, RETAINS STAKE

Telecom could retain a direct minority stake in the network business or else demerge the company, to ensure enough separation to meet government requirements. Telecom's network could then form the basis of the government proposal.

Implications: Probably the best value option for Telecom shareholders as it enables them to maintain exposure to the network business, which currently provides around a third of the group's earnings.

Telecom's network arm has been valued at NZ$2 billion to NZ$2.4 billion ($1.4 billion to $1.7 billion), more than half the company's total NZ$3.7 billion market capitalisation.

Telecom's negotiations with the government are expected to run for some more months.

TELECOM SPLITS, SELLS ENTIRE NETWORK

Telecom might divest its network arm, either through a trade sale or a float, and become predominantly a retailer of phone and Internet services. This could be in line with the government's stipulation, although it has ruled out buying the network itself.

Implications: It would likely provide a large capital return to Telecom shareholders but also have the harshest financial impact. Telecom would retain a mobile network, a hefty retail operation and a large customer base but it would have shed the highest margin portion of its business.

TELECOM DOES NOT SPLIT, EXCLUDED FROM NETWORK

If negotiations fail, Telecom would remain as one company and compete against the new network.

Implications: Short term implications would be fewer but longer term, Telecom could expect further erosion of earnings as the new network begins to compete with faster services.

Some analysts say the economics of the new network are uncertain, and Telecom could retain market dominance for some time. However that very fact is seen adding impetus to the negotiations to get Telecom's network involved in the process