KEY POINTS:
If Telecom implements its plan to split in two, it will lose its place as the largest company on the New Zealand Exchange. And it would slip down the list of companies on the Australian Stock Exchange and perhaps out of sight of some international fund managers, who
own so much of it.
Telecom's bold plan to hive off its fixed-line network into a different company is probably the best way to ensure all players in the telco field get fair and equal access to the network. If the network company has only its shareholders to answer to - rather than the Telecom board - it's bound to treat everyone equally; that is, on commercial imperatives alone.
Certainly the plan is much simpler than the Government's complex and messy scheme, which involves Telecom holding on to the assets and setting up incentives and Chinese walls to ensure the network managers treat everyone equally.
But Telecom's plan would make it a much smaller company as a result. It now has a market capitalisation of about $9.7 billion, making it New Zealand's largest listed company.
It's not hard to see how that market capitalisation could be halved.
Imagine it sells off its network for $4 billion to $4.5 billion (an estimate of its replacement cost) and returns much of the money to shareholders, or hives the network off into a different company and then distributes the shares to shareholders.
Add to that the potential for a $1 billion capital return from the Yellow Pages business, and Telecom looks like it could have a market cap of $5 billion or less.
This would take it below Contact Energy and Fletcher Building to be the third-largest listed company on the stock exchange.
On the Australian Stock Exchange the fall would be even more dramatic. Telecom is now the 38th-largest listed stock on the ASX, between Alumina and Bluescope Steel.
If its market cap dropped to $5 billion (A$4.45 billion), it would fall to 72nd place, behind pathology services company Sonic Healthcare - which owns Diagnostic Medlab in Auckland.
But whether Telecom's diminished status in the eyes of international investors would be a problem for the company is debatable.
Telecom relies on foreign shareholders more than most other companies. Only 28 per cent is owned by New Zealanders. The rest is owned by foreigners, including Australians with 25 per cent and North Americans with 33 per cent.
Some of those foreign investors would decide that a smaller Telecom was too small to bother with and sell their stock. But if the price falls too far, there'll always be someone there to pick up the stock at a bargain price.
But a smaller Telecom could be bad news for the New Zealand Exchange. Telecom is 19 per cent of the capitalisation of the NZX-50 index and accounts for 35 per cent of the value of stock traded on the exchange.
Having a smaller - and potentially less liquid - Telecom on the board would take a chunk out of the NZX's revenue. The worst case is that the value of trade in Telecom could be cut in half or more.
But maybe it won't be that bad.
Yellow Pages' new owners have said they plan to float the company in a few years and the network company, or part of it, could also be floated.
Add to that the fact that Yellow Pages plans to raise debt on the NZX and the new network company could do the same and things look a bit better.
And there's potential for some real upside from the new, thinner Telecom.
Freed from fighting a rearguard action to retain exclusive access to its network, Telecom might be able to turn its focus more to growth.
Shake on it
Over at TelstraClear, there must be more questions about chief executive Allan Freeth.
On Tuesday, the Australian-owned telco abandoned plans to build a $50 million wireless network in Tauranga, which was to have been the first step in a nationwide mobile and broadband network.
Setting up a nationwide wireless network could have made TelstraClear a serious player in New Zealand's telecommunications market.
But that ambition appears to have fallen by the wayside and this week's decision raises questions about its strategy in this country - if it has one.
Freeth said TelstraClear wasn't going ahead with its plans because its agreement with Vodafone - which was to provide cellphone coverage for parts of the country to which TelstraClear's network didn't extend - fell over. He accused Vodafone of going back on the deal.
"We had a number of verbal agreements. There was even a number of handshakes involved in that," he said.
This is extraordinary. It's hardly believable that a chief executive planning a $50 million investment, which hinged on getting services from a competitor, would rely on verbal agreements and "a number of handshakes" with that same competitor.
TelstraClear has fibre broadband networks in Wellington and Christchurch and is now planning to take advantage of local loop unbundling to introduce broadband nationally.
But this doesn't really differentiate it much from any of the other small internet service providers.
TelstraClear does have deeper pockets. But Sol Trujillo, chief executive of Australian parent Telstra, hasn't so far shown much interest in New Zealand.
