Liam Dann: Plenty to get excited about as Telecom faces up to inevitable

Telecom, which hit another all-time sharemarket low this week ($1.85 for anyone who can still bear to look) appears to be nearing the end of its natural life - at least in its current form as the monolithic company we've loved to hate and hated to love for the past two decades.

The structural separation being considered by management looks more and more likely every day.

On Thursday chief executive Paul Reynolds, talking to Australian analysts, spoke openly about the creation of two new listed companies as a possible model for the split.

For those who feared the demise of Telecom could be yet another nail in the coffin for the local stock market those words must have brought some glimmer of hope.

A structural separation was not the board's preferred choice but in the face of unrelenting regulators they seem to have conceded they have no choice.

If the process is managed well, there is still much that is good to be salvaged from the wreckage of the company that could once claim to be New Zealand's biggest.

With a market cap of just $3.5 billion there is surely a case to be made that the sum of Telecom's parts is worth more than the whole.

The separation could provide local equity investors with more choice and potentially more value.

There is still a lot of uncertainty about which bits would go into which company. But broadly there would be the wholesale business that runs the network and there would be the retail business that sells mobile phone and broadband services.

The lines business is unsexy but generates a steady revenue stream.

Individually it would be valued at a lower earnings multiple than the retail because it has limited potential for growth and increased future earnings.

But it would deliver regular dividends and that would suit many investors.

In fact in turbulent times steady-as-she-goes infrastructure assets become very popular with institutional investors. And it would also be right in the hunt for a big share of the Government's $1.5 billion broadband spend-up, so in the short term it could have some expansion potential.

The other company, the retailer, would still be no minnow by NZX standards.

Telecom is the No 1 broadband provider and not far behind Vodafone in mobile.

There have always been arguments that it holds its strong position in broadband because of advantages from its network ownership. If that is true, then those would be gone.

But it could also be argued that the regulatory regime, designed to ensure it doesn't have an unfair advantage, has done a lot more harm than good - at least in the past couple of years.

The current share price, if nothing else, provides some evidence of that.

Unshackled from the distractions of battling the regulators, one imagines a retail business let off the leash, aggressive and hungry to expand.

It could represent a real threat to other market players.

What's not clear yet is which part would be treated as the parent company and which part would be floated off. Would shareholders be allocated shares in both or would they retain shares in one and take cash from the float of the other?

Either way there is plenty to get excited about in the proposition.

When the history is finally written the bigger question might be why Telecom fought it for so long.

www.twitter.com/liamdann