Regulators concoct a nasty cocktail for Telecom investors

By PETER GRIFFIN

Senior executives in the telecoms industry say the biggest single factor pulling down Telecom's share price is uncertainty caused by regulatory changes that have shaken confidence among Telecom's substantial US shareholder base.

Telecom shares rallied yesterday to close up 12c at $4.51. But the stock hit a 14-month low earlier this week after sitting well above $5 in October.

Industry executives, who did not want to be named, said the market underestimated the discounts in interconnect and wholesale pricing delivered by telecoms commissioner Douglas Webb in draft decisions that radically reduce the prices Telecom can charge TelstraClear for network access and services.

Those decisions, with an earnings warning from Telecom and speculation about AAPT, its Australian operation, combined to chip away Telecom share gains.

"The interconnection decision came out on the same day Telecom issued its earnings guidance. The two together were a nasty cocktail for the market," a source said.

While the regulatory decisions attracted immediate attention locally, the impact in the important US market was delayed.

New Zealand fund managers and investors hold about 25 per cent of Telecom's shares, with more than 40 per cent held by US investors.

Australian investors are believed to have increased their collective stake in Telecom, following the sell-down of most of Verizon's 21 per cent, from about 8 per cent to about 14 per cent.

The remainder of the stock is spread among Asian and UK-based investors.

Telecom's share price has been falling on low trading volumes.

"One sell order keeps getting pushed into the market when there's not much buying going on ... the stock usually overreacts," a financial source told the Herald.

Global market trends compounded the effect.

"We're seeing a switch out of Telstra and Telecom into other stocks. It's mirrored partly by a switch out of the region."

Telecom is about to receive a report that will tell it exactly what ownership movements resulted from the Verizon sell-down.

US fund manager Capital International bought into Telecom with the Verizon sell-down and remains a sizeable shareholder.

There are understood to be several other large investors sitting just below the 5 per cent level that would require them to issue a substantial shareholder notice.

Meanwhile Telecom chief executive Theresa Gattung argues that the company has got its affairs in order in Australia, becoming profitable at the operating level and paring costs across the business.