KEY POINTS:
Elliott International's bid to get Mark Tume and Mark Cross on to the Telecom New Zealand board of directors has revived the idea of a wider structural separation of telco.
It is tempting to think of the influential US hedge fund nominating "the Two Marks" as an aggressive attempt to "Storm The Bastille" and push Telecom into radical change against the resistance of a conservative board.
With Elliott owning just three per cent of Telecom it is uncertain whether it will be able to drum up support to have Tume and Cross elected at the annual meeting on October 2.
But with Telecom shares tanking at $3.24, investors are showing strained patience with the huge scale of changes under operational separation that creates a complex, highly regulated company.
Under the Government agreement for operational separation - signed earlier this year - the company has three regulated divisions for networks, wholesaling and retail.
With massive restructuring and capital spending Telecom is forecasting another three years before profit growth. With the economic downturn, the retail side of the business is most vulnerable.
The Elliott idea of changing to a full structural separation might be messy, but a company focused on the wholesale and networks arms might appeal.
If National wins the election, it will implement its policy of a taxpayer-funded rollout of fibre-optic broadband networks.
That scheme would favour Telecom. A company focused on infrastructure and wholesaling - and not retail - might be a good bet under that scenario.
Insiders say Telecom chairman Wayne Boyd is in no rush for change to a structural separation.
But the company was actively considering a voluntary move to structural separation just 12 months ago after it had signed the agreement for operations separation.
If Elliott can drum up shareholder pressure, the company may be inclined to back the nomination of Cross and Tume rather than resist them.
Tume and Cross insist they have "an open mind" on structural separation such as Elliott's proposal for splitting off the retail arm from the networks and wholesale arm.
"We will be fiercely independent directors not representing Elliott, Cross told the Herald this week.
"Elliott's views on separation were well known." Cross said.
Asked why Elliott would support him and Tume unless they were advocating its view on separation, Cross said: "That is the risk they take nominating directors who respect their fiduciary duties.
"First and foremost they believe that Telecom could do with an added capacity of fresh talent at board level.
"The fact that they link that to structural separation does not link the two issues," Cross said.
But a telco source said the operational separation agreed with the Government was designed so the company could move to full structural separation quickly.
Industry players like Ernie Newman of the Telecommunications Users Association worry an internal debate could be a messy diversion.
There was concern about who would be a potential buyer for the retail assets.
But the interests of the industry are not necessarily those of investors.
A well placed industry source noted that the Elliott proposal - a split of the company with its retail arm floated and then potentially sold off - could have the effect of reducing the risk for Telecom and increasing its value.
New Zealand Shareholders Association chairman Bruce Sheppard says he knows little of Cross but there are indications Tume offers valuable skills to the board. But he believes that Elliott's passionate support for Tume and Cross has queered their pitch for joining the board.
Tume is well respected and makes an attractive candidate. He is on the Wellington directorship circuit with roles on state agencies. He has significant experience in the infrastructure sector, including with state-owned Transpower.
Intriguingly, last November, Tume was appointed as an additional director at the infrastructure company Infratil.
The chief operating officer for Infratil is Marko Bogoievski, a former chief financial officer for Telecom. The heir apparent to former CEO Theresa Gattung left after the job went to CEO Paul Reynolds. Tume is also a director of New Zealand Refining Company, and Ngai Tahu Holdings Corporation, and a member of the board of the Guardians of The New Zealand Superannuation Fund.
He is a former president of the NZ Financial Markets Association. He has had a 20-year career working in the New Zealand banking and funds management industries, and was previously Head of Funds Management at the Bank of New Zealand.
Tume has declined to say how he came into contact with Elliott prior to the nomination. Cross says he believes it was through conducting a standard director search.
Unlike Tume, Cross is a relative unknown. He has 20 years experience in the financial sector in New Zealand and overseas, the last 12 years in London and Sydney. Most recently he was managing director and co-head of the European natural resources mergers and acquisitions team for Deutsche Bank, co-leading a large team of bankers in the regulated utilities and energy sector.
Elliott says he led a number of significant transactions, working closely with both unlisted and public companies on mergers and acquisitions transactions and across debt and equity capital markets. He has a comprehensive understanding of utility regulation and investor perspectives on utility valuation.
Prior to Deutsche Bank, Cross held previous roles with Lloyds Bank (Australia) and Southpac (NZ).
ELLIOTT FOUNDER PLAYS HARD-BALL
Elliott Associates founder Paul Singer is a Republican Party activist who traditionally stays below the radar.
Over the past 31 years he has built up a hedge fund which has taken on corporate giants and sovereign nations while keeping out of the limelight.
After years of quietly supporting the Republicans with millions of dollars, including backing the Swift Boat crusade that derailed John Kerry's presidential campaign, his support for Rudolph Giuliani's failed bid for the White House was made public last year.
The New York Post ran details under the headline "Rudy's Vulture $$ Man" in reference to his hard-ball enforcement of debt from deals with emerging market countries.
In Bloomberg Markets magazine, Singer rejected the tag, saying emerging market debt was 2 per cent of Elliott's business and he did not buy debt from the poorest of the poor.
In 2000 he won US$80 million ($114.8 million) from Peru after an initial purchase of US$11 million in debt four years earlier and has been chasing Congolese assets in courts around the world in a US$39 million debt dispute.
"Our disputes have always been with sovereigns who can pay but refuse to do so," Singer said.
Born in 1944, he graduated from Harvard Law School 25 years later and set up Elliott (his middle name) in 1977.
Elliott employs around 175 people in New York, London, Tokyo and Hong Kong with around U$S11 billion under management.
Since its inception until late last year Elliott returned an average of 14.7 per cent against an S&P average of 12.6 per cent and peers quoted regard Singer as one of the best in the business. He was not dragged into the sub-prime disaster which he saw brewing in 2005, and warned fund managers to buy credit-default swaps which rise in value as the risk of default increases.
- Grant Bradley
