Kiwi Share blues hit Telecom

By RICHARD BRADDELL utilities writer

Telecom's Kiwi Share losses are continuing to mount, casting doubt on the value of the company's rural network.

In its second disclosure since Government-mandated rules took effect, Telecom yesterday claimed the Kiwi Share cost it an estimated $185.6 million in the year ended December 2000, $18.7 million more than in the 12-month period to June last year.

The Kiwi Share, which dates from the company's privatisation, requires Telecom to provide free residential calling and to cap its line rental charges.

Telecom is claiming that soaring internet use has seen the number of residential customers costing it money jump from 380,000 to 471,000 over the past six months.

It says these customers are costing it $400 each per year.

"The number [of loss making customers] has gone up as we expected, in line with internet use continuing to grow like topsy," said the company's Government and industry relations general manager, Bruce Parkes.

Most of the losses relate to Telecom's rural network, which has higher upkeep costs.

Telecom has been investigating the possibility of selling parts of its rural network. Electricity companies are among those expressing interest in buying.

Although one analyst recently said the rural network could be worth $2 billion, its drain on profitability suggests Telecom could be better off if it simply gave it away and stemmed its Kiwi Share losses.

The Government's position on Telecom's obligations was given in papers released in February under the Official Information Act.

Officials said Telecom should be given no general right to sell or transfer its local area networks, including its Kiwi Share obligations, since the benefits were likely to be relatively low.

Without the rural network, Telecom's profit might be boosted by around $126 million, adding perhaps $1.8 billion to its market capitalisation on a historic price to earnings ratio of 15.

Given the dour outlook for Kiwi Share losses, Telecom might conceivably be expected to offer a dowry to have the loss-making network taken off its hands, but that's "not likely," said one analyst, who declined to be named.

"There is value in the ubiquity of the network. You might be able to sell that network off or give it away or something like that, but you create other termination costs and things like that. It's not straight forward."

He declined to get into the argument about whether competitors should be contributing to Telecom's Kiwi Share losses.

Under new rules being introduced by the Government, Telecom reckons competitors would be liable for a quarter, or some $46.5 million, of its Kiwi Share losses.

Mr Parkes said that giving away the network would not solve the company's Kiwi Share problems because the related debt would remain behind.

Telecom's 11 per cent cost of capital was easily the largest cost in maintaining the network.

The intangible value of having a ubiquitous network has been estimated at only $5 million by UK consultant PricewaterhouseCoopers.

Mr Parkes said that if someone was willing to pay the book value of the asset and take on the depreciation and Kiwi Share obligation, Telecom might be interested in selling. * Brokers speculated yesterday that Telecom was the buyer of 1.9 per cent of pay television operator Sky TV, potentially taking its stake to about 14 per cent.

A parcel of 7.89 million shares was bought late in the session for about $29.96 million. Telecom ended the day up 10c at $5.87, and Sky TV was up 11c at $3.75.