If Vodafone buys TelstraClear it would be a direct play against Telecom and give it more clout to challenge the market leader, analysts say.
Australian-based Telstra announced to the NZX yesterday that it was discussing the sale of its New Zealand subsidiary, TelstraClear, to Vodafone.
Vodafone New Zealand approached Telstra about the deal, the statement said.
If the sale went ahead, sources suggested it might involve only parts, rather than the whole, of the company.
Craigs Investment Partners' Geoff Zame said if Vodafone took over TelstraClear's broadband customers, it would give it the critical mass to better challenge Telecom.
"It would create a clear number two who would be the most viable [ultra-fast broadband] competitor to Telecom so it would be reasonably compelling from that perspective," Zame said.
The market reacted strongly to the news, with Telecom shares slumping 4.1 per cent to $2.435, a drop of 10.5c.
Telstra's share price on the NZX closed up 5c at $4.69.
First NZ Capital's Greg Main said the sale would be a "small negative" for Telecom.
"Obviously you've got Telecom as the big player and then you've got Telstra and Vodafone who are the next big players ... so you're getting together number two and three to compete with number one," Mainsaid.
"In the first instance you'd say it's slightly negative [for Telecom].
"Exactly how negative is the next question and that's harder to call."
Research from AUT University released last year suggests Telecom has a 49 per cent share of the home broadband market, while TelstraClear and Vodafone have 16 per cent and 13 per cent respectively.
While a merger would present a challenge to the incumbent, Main said there would be some risk for Vodafone.
"TelstraClear hasn't knocked the lights out of the market, if anything they've probably gone backwards ...Vodafone has to be able to execute where Telstra hasn't to put the pressure on Telecom."
IDC analyst Glen Saunders said Vodafone would gain from picking up TelstraClear's national fibre infrastructure, its equipment in telephone exchanges and its cable network in Wellington and Christchurch.
However, Forsyth Barr's Guy Hallwright said Telstra was likely to want to hold its end-to-end network for corporate customers and it was probably only its residential business that was up for sale.
Hallwright said: "For that [Vodafone] would get an HFC [Hybrid fibre-coaxial cable] network around Wellington and some of Christchurch and some customers and 50,000 or so mobile customers ... but it doesn't seem that either of those would be particularly valuable so it I don't think it is a compelling story for Vodafone."
Buyout would benefit customers
Consumers would likely benefit if Vodafone bought TelstraClear, says the head of the telecommunications users association (TUANZ)
"It's probably good in terms of giving Vodafone the scale to really have a crack at Telecom in the fixed-line market," said TUANZ chief executive Paul Brislen. "Nobody else is really big enough to do that."
Given Vodafone's existing presence in the mobile market, adding TelstraClear's national capacity to it would create a "whole different ball-game", he said.
"Telecom and Chorus both would be really quite concerned I think."
Although competition might be affected if the merger went ahead, Brislen believed the benefits for consumers could outweigh this.
"Having a battle between number one and number two [in the market] is a good thing," Brislen said.
"Telstra's never really taken it to Telecom in the way that a combined TelstraClear-Vodafone could."
Brislen said news Vodafone was eyeing TelstraClear goes against rumours Telstra planned to buy Vodafone. "My spies tell me that Telstra Australia was doing due diligence on Vodafone New Zealand," he said. "[It] clearly thought the asking price was more than they were willing to pay and I imagine Vodafone's said, 'Well what about TelstraClear?'."