B&B stake 'menaces' Telecom

Aggressive Australian investment bank Babcock & Brown has built a $40.5 million stake in Telecom, raising the spectre of a break-up of New Zealand's largest listed company.

B&B - which has just completed a €2.4 billion ($4.73 billion) takeover of Ireland's Eircom - would confirm neither its holding nor its motives. But sources familiar with the investment say the bank holds at least 0.5 per cent, or just under 10 million shares.

Investors said the stake would send a strong message to Telecom's board and management.

"They are menacing. I would be concerned if they popped up on my register. They will have aspirations to take the infrastructure assets out of Telecom," said one investor.

But others cautioned against reading too much into the bank's holding. If the bank was serious, it would have built its holding into a meaningful position of more than 5 per cent during the recent share-price weakness.

Since May - when the Government disclosed its plan to open up the network to competitors - Telecom's shares have plunged, wiping almost $2.6 billion from market value.

They were also hit last month, when Telecom disclosed a $435 million annual loss. Last night, they had recovered from their recent lows of $3.95 to close up 9c at $4.18.

Meanwhile, Telecom's planned disposal of its valuable Yellow Pages operation might deprive the bank of one of the main prizes of a breakup, some observers said. Telecom disclosed last week it would run a scoping study on the business, which analysts estimate is worth $1.6 billion to $1.8 billion.

B&B is a vocal supporter of arguments that incumbent telecommunications companies' networks should be split from their retail operations.

This attitude matches the New Zealand Government's enthusiasm for heavy regulation of Telecom. It may also help B&B to overcome a Government veto on individual investors holding more than 10 per cent of the company and any foreign shareholder owning more than 49.9 per cent.


Babcock & Brown

* Global investment and advisory firm.

* Founded in San Francisco in 1977 and listed on the Australian Stock Exchange in 2004.

* Operates from 21 offices across Australia, the United States, Europe, Asia, United Arab Emirates and Africa and has in excess of 810 employees worldwide.

* Five operating divisions: real estate, infrastructure and project finance, operating leasing, structured finance and corporate finance.