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Telecom's struggling Australian subsidiary AAPT is understood to be in merger talks with network company PowerTel to block a potential takeover by rival Optus.
Telecom - whose shares hit a post-unbundling high yesterday - is already in a partnership with Australia's PowerTel, which was agreed last year in an attempt to revive its Australian business.
The Business Herald understands the New Zealand telco is negotiating to buy a blocking stake in PowerTel in order to deflect a takeover bid from Optus. A deal is expected in the next month, but could be finalised within a week, according to a source familiar with the negotiations.
PowerTel has the second largest fixed-line broadband network in Australia, after Telstra, and mainly provides wholesale data, fixed-line voice and internet services. It has a market capitalisation of A$284 million ($321 million) and owns a 20 per cent stake in broadband group iiNet.
Australian-based ABN Amro telecommunications analyst Ian Martin said Optus could make a bid for PowerTel to prevent PowerTel and AAPT merging and becoming a significant third retail fixed phone line provider.
The combination of PowerTel - with a large network capacity - and AAPT's retail business would challenge the position of Optus, he said.
Any move by AAPT to take a blocking stake in PowerTel would be sensible, he said. "That would give them some negotiating position if Optus did bid for PowerTel. They would certainly have a seat at the table if there was any consolidation."
Telecom and Optus had not been on good terms over the past few years, he said.
"Notwithstanding the fact that Optus doesn't operate in New Zealand, you might find an accommodation between them but it's not there at the moment," said Martin.
AAPT needed to merge with PowerTel because it did not have the network infrastructure capacity to compete effectively in the Australian marketplace on its own, Martin said.
Under its agreement with PowerTel, it resells superfast ADSL2+ broadband. When the deal was signed in November, Telecom said it would eventually save AAPT up to A$90 million a year.
Shares in Telecom rose 2c to $5.11 yesterday - their highest price since they plunged in May after the Government said it would force the company to open its phone network to competitors.
Industry observers said investors were seeing value in Telecom - whose shares hit a low of $3.95 last August - because late last year it had avoided the worst-case outcome of structural separation - splitting the company into two companies with separate chief executives.
Also, confidence has grown among investors that Telecom will get a good price for its Yellow Pages business, which it put up for sale late last year.
Meanwhile, PowerTel was under pressure to consolidate like other Australian providers such as Primus and Macquarie Telecom, because its fixed-line calling margins were under pressure, said Martin.
Speculation about a takeover bid for the company has seen its share price double from $1.02 in September to $2.04 yesterday.
The company lost A$8 million in 2005 and A$22 million in 2004. Powertel's chief executive Paul Broad could not be reached for comment yesterday.
Telecom bought AAPT in 1999 for $2.2 billion but, after a series of writedowns, values it at just $270 million. AAPT was put up for sale early last year but Telecom failed to find a buyer.
Telecom said AAPT's wholesale agreement with PowerTel would see AAPT scale back and probably eventually dispense with its own network in Australia and rely more on PowerTel. It would save AAPT A$15 million to A$20 million this year.
