Investors pile in to Telecom

By ELLEN READ and AGENCIES

Two or three overseas institutions are understood to have bought large chunks of the huge Telecom stake sold by US phone giant Verizon.

On Thursday Verizon sold all but 1 per cent of its 20.9 per cent stake to US investment bank Merrill Lynch, Pierce, Fenner & Smith for about $4.35 a share, a 10 per cent discount on that day's price.

Merrills yesterday sold the stake to a variety of mostly US, British and Australian institutions at $4.50 a share.

Telecom shares closed on the market yesterday at $4.80, after trading between $4.63 and $4.80.

Not only did the shares prove volatile, their placement created a record daily turnover in the New Zealand market.

About $1.89 billion of Telecom shares changed hands yesterday on the local exchange, a level of trading that has not been seen since April 1998, when $603 million in Lion Nathan shares were sold and the market turned over $1.3 billion.

Telecom finance manager Philip King said a third of the stock sold by Merrills went to Australia and New Zealand institutions combined, with the rest fairly evenly split among Asia, Europe and the United States.

"We haven't been given any specific names yet. Merrills are bound by confidentiality at the moment," King said, adding that Telecom hoped to hear who its new investors are next week.

Market players said there was strong domestic demand for the stock, with allocations to New Zealand institutions scaled back aggressively.

However they saw that as a sign of confidence in the company.

Telecom chief executive Theresa Gattung agreed, saying the sale of the Verizon stake would have a healthy impact on Telecom's share price.

"The share price is likely to remain a bit subdued in the short term - effectively we've had the equivalent of several months of trading digested in one day.

"Medium term it should be quite positive, because it's removed the uncertainty around 20 per cent, which is a big chunk."

She thought the oversubscription was a sign that Telecom was seen internationally as a good buy.

"It was many times over-subscribed at that $4.50 price, so we see that as a real vote of confidence. The sector is still in the doldrums internationally."

Brokers said the completion of the sales by Merrills was positive for the stock and the wider New Zealand market.

"I think that Telecom has been viewed very positively by offshore investors, but they have been wary with the Verizon overhang," JBWere broker Peter Stokes said.

"While some of those fund managers will have been offered and have taken stock, I think it makes the case for offshore interest in Telecom that much stronger."

Analysts said Telecom was performing well compared with other telecommunications companies around the world.

"We would say Telecom is fundamentally undervalued, even at the $4.80 level, so this does represent a bit of an opportunity for the offshore investors looking for value," Macquarie Equities senior analyst Arthur Lim said.

"It's one of the few telcos that has increased its [core] earnings in a time when the others are coming to all kinds of grief, having got too much debt, having overpaid for 3G licences and the like."

Telecom's pre-abnormal profit in the year to June was $670 million, up 9.1 per cent on a year earlier. A write-down of its investment in Australian carrier AAPT dragged it to a loss of $188 million.

ASB Securities managing director Tim Preston said the sales were a good vote of confidence in Telecom from a global perspective.

He said the rumoured large investors were unlikely to be in the stock for a quick gain and would probably have made strategic decisions to invest long term.

Verizon, the biggest US local telephone carrier, had been seeking to sell down its cornerstone stake in Telecom for nearly a year.

It has been under pressure from ratings agencies to reduce its total debt of around US$62 billion.