Panic selling wipes $1b off Telecom

Theresa Gattung

Telecom shares dived to 2-year lows on massive turnover yesterday as the Government's shock announcement that it would open the company's network to competitors created a wave of panic selling when the sharemarket opened for business.

Within minutes of opening the market leader's shares plunged 10.6 per cent or 56c to $4.99 from Wednesday's $5.55 close. The shares continued to trade lower over the morning, plumbing an intra-day low of $4.96 by 11am before recovering to end the session 49c or 8.8 per cent lower at $5.06. That stripped almost $1 billion from Telecom's sharemarket capitalisation.

More than 81 million Telecom shares with a combined value of $408 million changed hands - equivalent to about three times the entire New Zealand market's average daily turnover.

"There was a fair degree of panic this morning from both retail and institutional investors wanting to get out of their positions in Telecom," said Hamilton Hindin Greene broker Grant Williamson.

The losses followed a 7 per cent fall in Australia on Wednesday, where the market was still trading when Communications Minister David Cunliffe announced a sweeping package of measures intended to accelerate the uptake of broadband services by businesses and consumers. Telecom shares were also hammered in overnight New York trade, falling 9.3 per cent.

The impact on the local market's benchmark index, in which Telecom carries a huge 21 per cent weighting was also sobering. The NZSX-50 closed 73 points or nearly 2 per cent lower at a two week low of 3693.2.

Although the opening up of Telecom's local loop or copper wire telephone network had been widely expected, analysts and investors were surprised by the scope of the measures and the suddenness of the announcement.

Although Telecom shares did recover somewhat from their early lows, ASB Securities chief Tim Preston said it wasn't much of a bounce or a reprieve for the beleaguered company.

"The problem at the moment is that it's really trading in a vacuum. The announcement that came out was very light on detail," he said. "Until there's a clearer picture there's going to be a lot of volatility in the stock."

Other commentators believed Telecom shares would likely continue to trade lower in coming sessions.

Wednesday's tougher than expected announcement has resulted in several brokers reviewing their valuations and forecasts for Telecom, although the lack of detail and threat of even more onerous regulation such as separating the company's network and retail operations made that a difficult task.

"There will remain considerable uncertainty until all the relevant details around pricing and terms and conditions are worked through over the next couple of years," said Forsyth Barr's Jeremy Simpson.

"This ruling provides a further serious overhang of regulatory uncertainty that we thought may have been avoided given an expectation that a new regime would provide some clarity for investors."

Forsyth Barr's initial review of its position on Telecom lowered the company's longer-term earnings forecast by 2 to 4 per cent.

"This has pulled back our valuation from $5.94 to $5.60."

Goldman Sachs JBWere analyst Andrew White said the package was "equivalent to our worst-case scenario of the potential regulatory changes".

Should the Government decide to follow through with other measures such as structural separation of the company's network and retail operations "this would provide a further layer of downside risk".

"In our view the Government has thrown the regulatory book at Telecom and in doing so has realised our worst concerns and more. We expect the share price to trade sharply lower and see a sub $5.00 share price as a distinct possibility.

"While it looks too late to alter our short-term market performance we remain very comfortable with the longer-term sell recommendation."