Chief's exit overshadows split details

Paul Reynolds. Photo / Supplied

News that Telecom chief executive Paul Reynolds will exit his job next year overshadowed new details the company released about its impending split yesterday.

Speculation over Reynolds' departure had run hot since Telecom won the bulk of ultrafast broadband contracts in May, but the company had remained silent on his intentions for months.

Telecom finally confirmed yesterday that Reynolds would lead it through its breakup, but that he would be replaced by July 2012.

Telecom chairman Wayne Boyd had already signalled he would step down as chairman following the demerger.

The telco proposed the split as part of its bid in the Government's broadband tender and said it planned to separate its retail business from its network arm, Chorus, by the end of November.

The split was given the green light by the Government on Tuesday, but still needs shareholder approval.

As part of its agreement with the Crown, network-operator Chorus will become a separate public company and deploy thousands of kilometres of fibre internet cables in 24 towns and cities around New Zealand.

Although investors will need to wait until the middle of this month for a scheme booklet on the demerger, Telecom released a number of details yesterday, including how debt will be shared between the two businesses.

Chorus is set to carry most of the company's liabilities and will shoulder about $1.7 billion , while Telecom retail will bear between $750 million and $950 million of debt.

After the split, Telecom retail will be the bigger of the two companies, based on adjusted pro-forma earnings before interest, tax, depreciation and amortisation (ebitda) of $1.125 billion and revenue of $5.1 billion for the 12 months to June 30.

Based on figures from the same period, new Chorus business had an adjusted ebitda of $676 million on $1.1 billion of revenue.

Telecom expects both companies to still be in the NZX-50 after the split.

When the demerger takes place, each investor will receive one Chorus share for every five Telecom shares held. Investors will receive shares in the new Telecom equal to their existing holding.

The company's share price tumbled in early trading yesterday, falling to a low of $2.45. The price clawed back throughout the day but still closed down 19c, or 6.96 per cent, at $2.54.

This drop can be partly attributed to a 9.5c quarterly and special dividend which went "ex" yesterday and came out of Telecom's share price.

Forsyth Barr analyst Guy Hallwright said the market also appeared to react to how Telecom planned to divide earnings between Chorus and the new retail business.

"It appears there is a bit less earnings in Chorus and more in the other part of the business than we were thinking," Hallwright said.

Ratings agency Standard & Poor's assigned Chorus a credit rating yesterday of 'BBB' and said the company had a "strong" business risk profile.

If the de-merger goes ahead, the agency said the new retail business would have a long-term credit rating of "A-", one notch below Telecom's present ranking. Another agency, Moody's Investors Service, said it would assign its equivalent ratings of "A3" to Telecom retail and "Baa2" to Chorus.