KEY POINTS:
No surprise is a good surprise was the response from analysts to the release of the Government's plan to split Telecom.
JPMorgan analyst Laurent Horrut said while the need to create an operational split would represent an undesirable intrusion in Telecom's business, he believed the future impacts had
already been priced into the stock and "arguably overstated by the market".
On Wednesday, Communications Minister David Cunliffe revealed final details of the plan to separate Telecom into three operationally separate divisions - a network unit, wholesale unit and retail unit.
Telecom had originally opposed the split, describing it as unworkable, and proposed its own model of separation in which the networks would be spun off and potentially sold.
However the appointment of British Telecom executive Paul Reynolds - who has first-hand experience of operational separation in the UK - as Telecom chief executive has seen a softening in its stance.
Horrut said one of the positives to come out of the announcement was the shelving of the structural separation plan "which we believe could have been even more detrimental to the company than operational separation".
"We view Telecom's structural separation counter-proposal as essentially a spectacular attempt to 'push back' on some of the Government's asks," said Horrut in a research note published after the announcement.
Horrut said separating the network business - which he valued at $3.3 billion to $4.1 billion - made little sense given the copper lines have historicallyallowed telcos to earn margins of more than 50 per cent.
He said the implementation costs of the operational split were difficult to quantify but Telecom's guidance of $200 million in capex and up to $40 million in opex was "particularly aggressive and probably significantly over-estimating the real costs".
"As such, the company's guidance is critical but given the current regulatory context we would certainly not take it as face value," said Horrut.
Sameer Chopra of Deutsche Bank said the recent announcement of mobile termination rates, draft wholesale and local loop unbundling prices and operation separation provides the company with a platform of regulatory certainty.
However, he said investors need to focus on company plans for cost reductions as declining margins startto bite.
Globally reduced margins have forced telcos to focus on cutting costs, particularly through better procurement deals on products and services, and centralising offices.
Following the company's annual result in August, Chopra noted Telecom's operating costs in New Zealand had increased by 4.8 per cent, while revenues grew 1.2 per cent.
He forecast revenue growth would dip to 0.7 per cent in the 2009 financial year, before recovering to 1 per cent growth.
Chopra said an upside of the final separation plan is the ability for the board to allocate capital expenditure across divisions, giving it the flexibility to invest in areas where it would make more money.
In a note written earlier this month, Citigroup's Kar Yue Yeo said the presumption was that opening up Telecom's network to competitors and improving operational transparency would create competitive pressure on Telecom to innovate by investing in faster broadband technology.
Telecom shares have continued to rise, gaining 14 cents on Wednesday following the Government's announcement. They closed yesterday unchanged at $4.44.
