Values frustrate telcos' tryst

By Giles Parkinson

Sydney view

If only doing business was as easy as falling in love. If it wasn't for corporate law and a stubborn shareholder, Roderick Deane of Telecom NZ and Lee Casey of AAPT could have happily eloped and consummated their tryst many months ago.

Alas, it wasn't to be. There are rules to be followed on the corporate stage, and with Fairfax and News Ltd acting out to perfection the role of the grumpy in-laws, no amount of sweet talk was going to win over the AAPT board.

It has all been so frustrating for Telecom, which has been trying to lure AAPT into a de facto relationship ever since it marched in and busted up the ham-fisted courtship of the same company by Cable & Wireless Optus.

And it is not as though AAPT has been an unwilling partner. It would love to share its network, staff and costs if it meant having access to Telecom's deep (though often tight) pockets to try to win more market share from Telstra.

AAPT is a business that is growing quickly. But it is soaking up money and needs more quickly for the roll-out of its CDMA mobile phone network, for example.

And a wee foray across the Tasman is a natural expansion for Telecom too. It is stuck in its home market in the role of domestic monster with limited opportunity for growth. Investing in AAPT is pretty much a low-risk play to tap into a growing market, and deregulation opportunities to boot.

That's why its strategy of building up a sizable stake and investing money in AAPT to help with its expansion plans makes so much sense. Telecom finally gets its footprint into the Australian market and AAPT has its capital options solved in one fell swoop. A variety of proposals came to nothing, and now comes the least savoury option of what amounts to a partial bid.

Shareholders in AAPT must be cursing their luck. They have now had two takeover offers but no buyers for their shares. The first got knocked out by the competition regulator, and the second - in the eyes of these minority shareholders - has more of the characteristics of a Trojan horse than a white knight.

Telecom has offered $A5.10 a share but in reality it doesn't want to buy any stock apart from the 10.6 per cent stake held by Optus. To protect against the possibility of someone else actually accepting the bid, Telecom has slapped on more conditions than you'd find in a "free" mobile phone offer.

It reserves the right to abort the bid if, for example, the Australian stock market falls a mere 5 per cent or long bond yields have a barely perceptible rise. It's a wonder it didn't include the chance of rain on the South Island.

For most AAPT shareholders, this offer has a bad odour about it. If Telecom NZ succeeds in its goals, AAPT will become a lot less liquid and an unlikely takeover target. Its shares might just become valued on fundamentals alone, which would be bad news for shareholders in any telco stock.

That is possibly the most likely cause of the intransigence from News and Fairfax, as much as their mutual distrust and inability to agree to anything apart from the colour of the sky.

It means that Casey and the AAPT board have to tread very carefully, and ensure the interests of the minority shareholder are well looked after.

The board has no choice but to dismiss the bid out of hand. The Grant Samuel report prepared for the Optus bid valued each AAPT share at $6.04 to $7.01. Casey himself described the Optus offer as absurd.

In rejecting the bid, he should specify that all shareholders should reject the bid, and that the interests of minority shareholders are best served by no one accepting the offer. If Optus and another institution were to accept, identifying the best option for the remaining shareholders could pose an interesting dilemma.

Perhaps then, the shareholders might be tempted to opt out and cash in on the big gains AAPT has made since listing in 1997. If so, they had better pray for an extended period of fine weather in Dunedin.

Telecom knows how unlikely that is. But if it is forced into a rain dance, it knows it is back to square one.

* Giles Parkinson is deputy editor of the Australian Financial Review.