Telecom: floating on a fast IT breeze

By Richard Braddell

Between the lines


One could be forgiven for thinking that Telecom is on the verge of floating a business. Xtra, perhaps, the Southern Cross cable, or maybe a roll-up of its cellular operations including those of AAPT.

The idea of floating them off is not new. Former chief executive and now chairman Roderick Deane mooted the idea last year as a device to force the market to recognise their intrinsic value. Judging by his talk yesterday, something may happen sooner rather than later.

"We think within management and board that there's huge potential future value in these different territories," Dr Deane said.

And since voice traffic is no longer going to be the cash cow it once was, getting the earnings potential of these youthful activities recognised now is all the more important.

But the dilemma, as chief executive Theresa Gattung observes, is that if you sell part of a business, you lose the operational flexibility you had when it was fully integrated. For example, Telecom was able to shift business-oriented activities out and back into Xtra last year, in a way that would have been impossible if even part of Xtra was publicly listed.

Furthermore, there's the delicate question of how much future value Telecom is willing to surrender in order to get value recognition for these businesses.

It has to tread warily. As Ms Gattung notes, nobody recognised four years ago that Xtra would be a business worth $2 billion today. Nor did they anticipate voice prices would fall so dramatically.

There are also issues of sequencing. Xtra looks like an ideal candidate. Even though it is growing rapidly, it is making money.

Meanwhile, both AAPT chief executive Larry Williams and Telecom itself see potential for a roll up of the two companies' cellular businesses in a transtasman float. But serious issues need to be resolved such as where it would be headquartered and listed.

One likelihood is that it would be the entire cellular business, not just the new CDMA networks, if only because existing cellular customers will eventually have to migrate to CDMA.

Meanwhile, Telecom has been experimenting with another way of getting value recognised. In the last two quarters it has broken down Xtra's revenue, if not its profits, to see if more information about the separate pieces would help.

Ms Gattung suggests that it has had some impact, but perhaps not enough. Even more detailed information might make the difference. After all, there is no rule that says information cannot be disclosed just because a business is not publicly listed.

But the problem needs to be resolved. With a share price that continues to slosh around well beyond its $10 peak, and with little prospect of voice revenue coming to its rescue, recognition of Telecom's future business prospects is vital.