Telecom seen as candidate for LBO

Telecom may be taken over in a leveraged buyout (LBO) because a drop in the share price makes it attractive, Credit Suisse analysts say.

"We view Telecom's recent share price weakness as creating an opportunity for a leveraged buyout consortium to bid for the company," Justin Cameron and Mark Storey said in Sydney yesterday.

Telecom, with an $11 billion market value, is New Zealand's largest company. In leveraged buyouts, firms put up a little of their own money and borrow the rest, piling debt on to the company being acquired.

Credit Suisse says buyout firms are being lured to returns from telecommunications companies as global interest rates fall.

Softbank this month raised funds for the buyout of Vodafone's Japanese mobile-phone unit and Australia's Babcock & Brown Capital is leading a group seeking to buy Eircom, Ireland's biggest phone company.

A Telecom spokesman said the company did not comment on analyst reports.

Shares in Telecom, which accounts for 22 per cent of the NZSX-50 Index, had dropped 7.5 per cent so far this year, before yesterday, and the company had reduced debt, making it a more attractive target, the analysts said. Telecom shares ended up 6c yesterday to $5.62.

Credit Suisse said a buyout firm could bid as much as $6.75 a share for Telecom and still generate an internal rate of return of 25 per cent, exceeding the typical LBO return of 20 per cent.

The brokerage upgraded its 12-month price target on the stock to $6.30 from $5.79, reflecting the potential price of an initial bid.

Credit Suisse said a buyer could sell Telecom's Australian AAPT business, which is already under review for a potential sale or merger, and could also sell its Southern Cross Cable stake.

A potential bidder could also negotiate with the New Zealand Government to overcome ownership restrictions on Telecom in return for more regulations on high-speed internet.

- BLOOMBERG