Telecom rides the slippery slide

By RICHARD BRADDELL

Telecom shares have been falling faster than the New Zealand dollar. And they have not been helped by the report of the telecommunications inquiry.

Losing another 31c to $5.40 yesterday, the shares closed at their lowest since March 1995.

Analysts offered several reasons for the slide. One was the general negativity in the market after Reserve Bank Governor Don Brash's comments about stagflation.

Others pointed at Telecom's strong response to the telecommunications inquiry's report, particularly with regard to the Kiwi share.

Telecom is not alone in suffering sharp falls in its share price. Most of the world's big telecommunications companies are experiencing the same fate.

The world's largest, NTT of Japan, is 42.8 per cent below its peak in the last year, while the main player in the United States, AT&T, is down 51.3 per cent. British Telecom and Deutsche Telekom are down by similar margins.

Although one analyst said the telecommunications inquiry had already been priced into Telecom's shares, the small parcels traded suggested small investors might have been spooked.

But yesterday's fall has been part of a trend. And on Wednesday, in an interview with the Business Herald, chief executive Theresa Gattung canvassed a host of reasons as to why the price was weak.

For instance, the 20 to 25 per cent fall suffered by telco stocks globally, in large degree due to the disruptive impact on telco business models of the internet.

The dampening of sentiment following stratospheric prices paid in Europe for third-generation cellular spectrum had not helped either. Nor had questions about whether third generation would meet its promise, even in part.

"Most telcos in their domestic markets are perceived to be under pressure, either because they are not perceived to have growth options to execute on, or because the growth options they are perceived to execute on carry risk," Ms Gattung said.

"That's not the traditional model of a telco, is it? Stable revenue streams, stable cashflows. What's more, for some of these growth areas such as cellular ... the capex [capital expenditure] for spectrum is higher than was previously forecast."

Telecom has its own growth strategy via AAPT, its Australian subsidiary. But while that may be nowhere near as risky as rival Telstra's planned overseas expansion via Hong Kong's PCCW, the returns from that are not likely to flow for two or three years and, as Ms Gattung said, its ultimate success would turn on "how well we execute."

Globalisation was also making life tough.

"The world we are in now is just not safe and secure and stable in the way that it used to be. I think that's true for companies and it's true for countries. It's certainly true for small countries like New Zealand," she said.

But Telecom also has acute concerns about the Kiwi share proposals. While it is happy to see the arrangement that limits residential price rises and regulates service levels renegotiated, it is concerned that it might become enshrined in legislation, and that force of law would be given to proposals that could make huge demands on financial resources.

That concern is shared by some analysts who worry that redefinition of residential service would require upgrading the network to give all rural customers internet access, something Telecom says could cost up to $500 million.

"We do not buy the view that the Kiwi share is like the Treaty of Waitangi, a living, breathing document," Ms Gattung said.

"It's a contract. We stand ready to renegotiate the contract. We recognise the world has changed but we are not going to accept any proposal that has a completely open-ended risk to Telecom in terms of increasing capex spend to support ever and ever-increasing standards throughout New Zealand."

She was not prepared to discuss how Telecom might react should the Kiwi share be rejigged according to the inquiry's proposals, other than to indicate that there would be "conversations" with the Government.

But if the telecommunications inquiry and global trends are putting Telecom under pressure, investors are also unsettled by Telecom's loss of ground to Vodafone in the cellphone market, the amorphous nature of its business online partnership esolutions and the rationale for its 10 per cent investment in Independent Newspapers, which has also bid for third-generation spectrum.

"You're not going to get much more on that from me," Ms Gattung said of the INL strategy, relenting only to add that while talks were progressing with INL and associate Sky TV, the spectrum auction was also attracting other bidders because prices were comparatively cheap.

Esolutions, meanwhile, was a vital step in the transformation from a voice-based company limited by New Zealand's geography.

Ms Gattung said Telecom and Clear were among the first telcos to become internet service providers. But for Telecom, the challenge was to move Xtra into the business-to-business market and that required working with customers as they moved online.

Expertise was needed in systems integration skills. Telecom had tried doing it itself before realising it was better to team up with one of its erstwhile competitors, EDS, with Microsoft becoming the third member of the alliance.

Ms Gattung conceded that it had taken time to get esolutions going, but it now had almost a full suite of applications - e-office, e-fax, and e-procurement - which were being advertised to improve visibility.

Not only was esolutions performing to budget, it was an important component in Telecom winning the $A5 billion ($6.4 billion) Commonwealth Bank telecommunications contract in Australia.

But what about Vodafone? Analysts worry that Telecom has entered the text-messaging market too late to capture the youth market, particularly since there is no intercarrier connectivity.

Maybe. But Ms Gattung said Telecom's research indicated that its introduction of text-messaging and aggressive promotion had arrested erosion of its cellular market share in this quarter.

Another issue: why did Telecom wait a year before taking full control of AAPT? Mainly because any quicker would have resulted in the immediate resignation of the chief executive and key members of the management team, she said.

Instead, AAPT had developed, and its share price with it. That extra value had been captured in Telecom's own market value.