Future flies on Telecom deals

By RICHARD BRADDELL

Telecom had to do something, and yesterday it did. After two years of hinting at, then retreating from, spin-offs and joint ventures, it has sealed two deals that suggest it has a real strategy.

The first, an alliance to unite its internet business Xtra with Microsoft's New Zealand consumer portal MSN to create XtraMSN.co.nz, should be an unassailable union.

But in spite of their clear dominance - Xtra has 378,000 users and MSN one million - Telecom's chief executive, Theresa Gattung, sees no regulatory obstacles, given the competitive nature of the online market.

For Telecom, the alliance will bring access to Microsoft's search tools, Hotmail, sports, global content and all the rest, aligning it with a global brand.

And it could form a platform for future exploitation of broadband DSL, not to mention relationships with Sky Television and INL.

But this is small beer beside the Australian third-generation mobile deal with Hutchison Australia, the scion of Hong Kong giant Hutchison Whampoa.

The arrangement will bring immediate access to a global telecommunications brand and third-generation mobile technology.

Hutchison Whampoa, which quit its second-generation mobile assets near the top of the market, is now working on rebuilding its global position in 3G, helped by $A50 billion ($61.65 billion) in liquid resources.

Meanwhile, the $300 million Telecom gets from Microsoft's subscription to Telecom convertible notes conveniently covers its initial $A240 million capital outlay in a new Australian third-generation mobile company known as H3G.

But while the Xtra/MSN deal was well received, there was hesitancy on Hutchison, largely due to the uncertainty shrouding 3G as a technology.

Not so, as far as Telecom was concerned. Indeed, Ms Gattung's enthusiasm suggests the deal is a low-risk trip to telco heaven.

Jeremy Simpson of ABN Amro said: "Telecom New Zealand has been criticised in the past for a lack of a global relationship, and this offers a straight linkage to a serious global player."

Essentially, Telecom and Hutchison will set up mirror-image 3G businesses on either side of the Tasman, with Telecom's initial stake in H3G set at 19.9 per cent stake. A further $A150 million will be injected over two years to match $A600 million contributed by Hutchison Australia or its Hong Kong parent.

At Telecom's request, Hutchison has taken an option on 19.9 per cent in Telecom NZ 3G (T3G) within 12 to 24 months of its launch.

Ms Gattung expects T3G to proceed, if only to ensure Telecom retains the technological lead it expects to get over Vodafone from the launch of its second-generation CDMA network.

Despite CDMA's superiority over any current Vodafone offering, Ms Gattung believes 3G must proceed in NZ, simply because Vodafone has adopted NZ as a centre of excellence.

She also expects Telecom's existing mobile businesses, which will be separate from the joint venture, to benefit from exploiting synergies that can now be identified.

But while the timing of the New Zealand 3G launch is uncertain, H3G is proceeding at a clip, with a project team expected to number 300 by year's end and equipment suppliers likely to be named within six weeks.

With all the capital in hand, H3G will be a $A2 billion business, given the $A900 million in spectrum licences it inherits from Hutchison.