Regulation and AAPT sale issues loom for Telecom

By Rachel Pannett

Telecom is expected to post a lower third quarter profit on Friday, as its troubled AAPT unit and the looming threat of regulation overshadow solid New Zealand earnings.

Market forecasts range between $220 million and $230 million, down as much as 12 per cent on the $259 million profit recorded in the same period a year earlier.

"The big issue for them is what is happening on the regulatory front... to some extent what happens in the result is the prelude, rather than the main game," Macquarie Equities head of research Steve Hodgson told NZPA.

Mr Hodgson expected a replay of the second quarter, with earnings before interest, tax, depreciation and amortisation growth for the New Zealand business of about 3 per cent and net earnings of about $223m.

Telecom has indicated it will use Friday's briefing in Sydney to announce the outcome of a bidding round for its troubled Australian subsidiary AAPT.

Local analysts hold a negative view on the sale, amid speculation potential bidders -- including Singapore Telecom's Optus, regional telco Soul, and a consortium of listed telcos including PowerTel and Commander -- have baulked at the A$650m ($783.03m) price tag.

"The risk that they haven't sold AAPT is high," a local analyst said on condition of anonymity.

"They are beginning to send signals that they have made no further developments ."

A report in today's Street Talk section of the Australian Financial Review said Optus had dropped out of the bidding, while representatives from PowerTel parent -- Hong Kong-based private equity group TVG -- were said to be in Sydney ahead of Friday's announcement.

Bids for AAPT closed on March 31.

The TVG consortium had previously been seen as a strong consolidation play, likely to launch a cash and shares bid that would leave Telecom with a stake in an ASX-listed merged group.

Telecom has said it would like to maintain an equity holding to protect its trans-Tasman business customers.

- AAPT put a dent in Telecom's second quarter earnings when its value was slashed by almost a billion dollars from A$1.46 billion to A$628m.

Mr Hodgson said a failure to sell the AAPT business would unsettle Telecom's share price, which has recovered from a low of $5.12 on February 27 but is still down about 6 per cent in the calendar year.

"If they haven't managed to sell it that would be the key downside risk," Mr Hodgson said.

Telecom was trading down 3c at $5.62 by midday.

Regardless of the AAPT outcome, looming Government regulation is seen as Telecom's biggest bugbear.

This week, Telecommunications Minister David Cunliffe released a report proposing to regulate mobile termination rates -- the price charged by mobile phone operators for connecting to their networks.

Telecom opposes regulation, saying the margins it makes on mobile calls are slim and regulation would discourage investment in new technology.

Also at issue, as part of a broader industry stocktake by the Commerce Commission, is Telecom's defensive grip on the local copper wire network -- seen as a barrier to the country's broadband uptake.

Market commentators say the broader regulatory review could see the Government unbundle the local loop -- allowing competitors like TelstraClear unrestricted access, or split Telecom into a wholesaler and a retailer -- putting it on equal footing with its rivals.


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