KEY POINTS:
Aggressive US-based hedge fund Elliott stunned Telecom investors yesterday, nominating new directors as it presses for another radical overhaul of the company.
Telecom chairman Wayne Boyd now has a fight on his hands as he faces a powerful but relatively small shareholder fomenting unrest. Elliott holds just 3 per cent but has a fearsome global reputation as an investor activist. It has until Telecom's annual meeting on October 2 to try to build support. Elliott's Hong Kong based portfolio manager, James Smith, said yesterday the company was acting alone.
"There is not a wider concerted offer behind what we have put together today - so far," he said.
"People we know on the [share] register will contact us to find out what is going on."
It is understood Elliott has already approached some key investors, some of whom have been hunkering down for the company's long-haul strategy back to profit growth in 2011.
That Government-negotiated restructuring plan, which splits Telecom into three operating divisions, will see the company facing a big capital spend and adjusting to a new business model.
But Elliott is questioning the ability of that proposal - agreed with the Government this year - to resolve problems and return value to the company.
It has nominated two new board candidates - professional directors Mark Tume and Mark Cross.
Elliott made submissions to the 2006 Government review of Telecom for a more radical change which would see the company split into two separate companies.
They would have been listed separately on the stock exchange. One company would be for networks and wholesale, with the retail business sold to provide a one-off payment to shareholders.
Many investors were baffled yesterday by the final game plan for Elliott.
One industry player said that there was some concerns about the company's future, but the Elliott move was "too late".
"Without a full-scale shareholder revolt it appears an uphill battle to turn around the company."
But it is not clear whether US investors such as Elliott will have less patience with the Telecom recovery plan than those in Australia and New Zealand.
Paul Glass of Brook Asset Management said the Elliott proposal deserved debate given the company faced a difficult road ahead.
"It faces the death of a thousand cuts - in my view is not worth more than $3 right now," he said, referring to Telecom's share price.
Shares closed down 4c yesterday at $3.36. Elliott sought to distance the firm from the two candidates it is nominating to the Telecom board - Infratil and NZ Superannuation Fund director Mark Tume, and the relatively unknown Mark Cross.
Elliott's Smith said that they were nominating independent directors.
"We are trying to develop some fresh ideas on the board and contribute different ways. We would see the board enlarged to include the two Marks - Cross and Tume." Asked if Elliott was concerned over other aspects of the company performance - its annual result last week showed profits down 15.5 per cent - Smith said the company was not performing well.
"I always look at the stock prices as a guide. The fundamentals generally, and especially last week, have been in constant decline.
"We have provided Telecom with a lot of research and thoughts - over separation as an example - we have taken advice from very well informed consultants and advisers.
"I would observe that none of that really seems to have found its way into what we observe on the outside of their thinking and strategy.
"Hopefully that will change with ... more breadth on the board."
Smith declined to say what discussions he had had with the Telecom board. Asked whether he was unhappy with management, he sad: "I would be careful not to speculate on individuals at this time."
He said that with other investors he had been surprised that an increase in depreciation reported in the annual results had not been foreshadowed at a lengthy meeting with investors in Sydney in April.
Telecom chairman Wayne Boyd said the board welcomed the interest of shareholders in Telecom's strategy.
"We have met with Elliott on several occasions over the last 12 months to discuss their views on Telecom's strategic direction, including the implications of structural separation," he said.
"Telecom has carefully considered the implications of structural separation, and does not believe that separating our retail and network businesses would be in the best interest of shareholders at this time."
