KEY POINTS:
Nine months into his stewardship of Telecom, Paul Reynolds must be wondering what he stepped into. Last Friday, his grim task was to announce a 15.5 per cent profit slump for the June year, a result that reflected past inaction and highlighted the difficulties ahead for a company forced to embrace competition, operational separation and the increased cost of network upgrades. Now, days later, an investor with a 3 per cent stake in Telecom has delivered further unwelcome news. United States-based hedge fund Elliott International wants to claim two seats on the Telecom board to press for the structural split of the company's retail arm from the remaining wholesale and network business.
Elliott describes the structural separation as "the next logical step in the operational process that Telecom began earlier this year". It says Telecom has languished behind other key international telecommunications companies, partly because of an unclear and outdated strategy. The company needs, Elliott says, to take immediate and serious action to improve its situation and to debate new ideas that would benefit customers and shareholders.
Part of Elliott's criticism is obviously directed at the previous management, whose sole aim appeared to be to use Telecom's dominance to deaden competition and head off regulation. But it is also clear that it is not enamoured with operational separation, the benefits of which have been championed by Mr Reynolds. Telecom changed course dramatically when it appointed him chief executive, partly on the basis of his first-hand experience with the process when he was head of British Telecom's wholesale division.
Elliott's plan would see a more complete separation. Telecom's retail business could be up for sale after being split from the wholesale and network business, with the two listed separately on the stock exchange. This is designed to release value that the hedge fund believes remains locked up in the current Telecom framework. Its submission to the Ministry of Economic Development during the lead-up to operational separation said there would no longer be a need to monitor the retail business' relationship with the network and no need to regulate the business other than the normal Commerce Act rules. In most respects, however, any newly released value would likely provide only a short-term fillip. And in the longer term, structural separation would mean a far greater degree of uncertainty about the shape of the telecommunications landscape in this country.
Telecom has already considered structural separation and concluded it would not be "in the best interest of shareholders at this time". Its board appears ready to back Mr Reynolds' management skills and his contention that operational separation is the best path forward and will deliver the returns needed to justify large-scale investment. He has said the strong performance of British Telecom's share price over the past couple of years is the best indication of what Telecom's shareholders can expect once operational separation is bedded in. If so, Telecom will emerge a far stronger, customer-friendly company, and its shareholders will share the benefits.
Either way, it seems unreasonable to now heap further upheaval on a company undergoing rapid change for the sake of a relatively small shareholder with a short-term investment horizon. The debate desired by Elliott may have to be held if Telecom's fortunes continue to wane and customer expectations are not met. But, at the moment, the priority must surely be to give Mr Reynolds the time and space to introduce his strategy.
