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Telecom's $400 million bid for junior Australian broadband company PowerTel has been welcomed by Australian analysts, although investors initially showed disapproval.
PowerTel's attractiveness stems from it having built a telecoms infrastructure that, combined with its exclusive wholesaling deal with iiNet, allows it to claim broadband coverage of about 80 per cent of the urban population.
ABN Amro telco analyst Ian Martin said it was "a good, inevitable development" and he did not think the A$357 ($404.67) million price, including debt, for PowerTel was overpriced.
"I don't think they're overpaying but it's a good price. Eight times ebitda's a fair price. If they come back in a year's time, you're going to have fairly reliable growth from PowerTel and stronger with AAPT's revenue on their network."
Mr Martin was referring to PowerTel's fibre optic network in major cities, which allows Telecom subsidiary AAPT to cut free from using Telstra's network.
PowerTel has the second biggest fixed-line broadband network in Australia, and stakes in iiNet and Macquarie Telecom, while AAPT, as the third largest phone company, has high customer numbers.
The result could be a company which gives number two phone company Optus a run for its money.
AAPT, which Telecom bought in the early 2000s for A$2.2 billion, has bled money ever since and Telecom has written off most of its investment. Mr Martin said this deal could help it claw back its good name.
"It's a tough business, particularly from the third tier [telco] category, but it's certainly stronger with the two of these together, than separately."
Analysts' approval was not matched by investors who sold Telecom shares down 10 cents, 2 per cent, to $4.97 yesterday. Brokers said investors were waiting for more details from Telecom's second quarter results on Friday.
Asked whether investor scepticism of AAPT was valid, Mr Martin agreed it was "a big issue, still, but it's certainly stronger with the infrastructure PowerTel have, ... and that might be a matter of making sure they hold onto the management team that's there in PowerTel".
He thought the only barrier to Telecom's success was a bid by Optus but it was unlikely, given the backing of the PowerTel board and the 10 per cent stake Telecom had through TVG, PowerTel's major shareholder.
BBY analyst Mark McDonnel also thought it was a good chance to improve Telecom's returns from Australia.
"PowerTel and AAPT represents a good pairing."
He also said the price reflected a clear premium, but was fair.
Telecom's chief financial officer Marko Bogoievski said yesterday that the deal was built on similar corporate culture between the two companies.
"We think there's strong strategic and financial merit in bringing the two companies closer together," he told a media briefing.
"There are a number of options for us to improve our overall position in the Australian marketplace ... and strengthening our trans-Tasman proposition."
Analysts saw benefits from PowerTel's stake in iiNet and its 10 per cent stake in fellow junior telco Macquarie Telecom Group.
"If Telecom NZ wanted to consolidate those entities as well, it would become more of a scale player in the marketplace," Credit Suisse telecommunications analyst Justin Cameron said yesterday. "As Telecom NZ consolidates, it removes the smaller players that can be irrational on pricing to build brand awareness and secure contracts."
Part of the reason behind Telecom's share price fall was a concern in the market that shareholders might miss out on a windfall from the sale of Telecom's directories arm.
Mr Bogoievski tried to allay those fears, saying the two deals were being conducted separately and indicating that the cash and debt offer for PowerTel would not affect existing long term capital plans.
Telecom is offering A$2.30 cash per share, valuing PowerTel at A$320 million, or A$357 million including net debt. Last year Telecom wrote down the value of AAPT to A$270 ($306.05) million from A$1.4 ($1.58) billion.
PowerTel's shares rose 4.6 per cent yesterday to the offer price.
Craig Brown, a fund manager at Walker Capital Management, said the main strategic reason for the acquisition was to get access to PowerTel's high speed internet infrastructure, rather than create a larger Australian presence which might be sold off for a higher price than AAPT alone.
It expects PowerTel would start to contribute to group earnings by the end of the June 2008 financial year.
Meanwhile, credit ratings agency Standard & Poor's says Telecom's planned takeover will improve its cash flow and give it greater scale.
Rating group Moody's affirmed Telecom's ratings saying the benefits of the deal would outweigh any increase in debt.
- NZPA
