Richard Inder: Telecom must learn to cut the crap

In the early 1990s Gerald Ratner was riding high.

He had taken over his father's jewellery business based in the London suburb of Richmond - where Rolling Stone Mick Jagger once shared house with his former supermodel wife Jerry Hall - and turned it into Ratners, the United Kingdom's largest jewellery chain.

His success was built on taking jewellery down market, offering the glitter of gold, platinum and precious stones to the masses. Before Ratner arrived on Britain's High Streets the average price of items sold in a jewellery store was around £200, but after his revolution the average price fell to just £20.

At its peak, Ratner's empire spanned 1500 outlets across Britain and the US and returned profits of more than £120 million in 1990.

The press was full of adulation. The Independent on Sunday, enviously detailing the oak panelling in his swanky Mayfair office, described him as "awesomely successful".

The Times declared how his "audacity and lack of fear thrilled and frightened [institutional investors]."

But he made a fatal error.

At a staid Institute of Directors convention in the Spring of 1991 at the Royal Albert Hall, he took the stage in the late afternoon and decided to declare the secret of his success.

Reuters recorded his speech.

"People say, 'how can you sell this for such a low price?' I say, 'because it is total crap'," Ratner said. "We even sell a pair of earrings for under £1, which is cheaper than a prawn sandwich from Marks & Spencer. But I have to say the earrings probably will not last as long."

The reaction was as swift as it was spectacular. More than £500 million was wiped from Ratners' sharemarket value.

Ratner left and the business was renamed Signet.

Ratner's sin was breaking trust with his customers. It is exactly the same error that Telecom chief executive Theresa Gattung committed when she declared that the company used confusion as a marketing tool, although her gaffe was less egregious.

In both cases the executives and, to a large extent their customers, knew the sad truth. But their declaration of the fiction as a fiction left no room for the illusion - in Ratner's case that his jewellery was precious and Telecom's case that its services were good value. In future any other deals pitched as value for money or high quality would be taken with more than a grain of salt.

The parallels do not end there.

Telecom's spin that Gattung was misunderstood bears more than a striking resemblance to the jewellery chain's damage control after its leader's outburst, but set that aside.

Both outbursts came when the organisations were supremely confident - to the point of arrogance - about their future. Even Telecom's highly regarded chief financial officer Marko Bogoievski told an investor conference in March that the heavy regulation the Government unveiled this month was not on the agenda. This view, fatally, was also held by Gattung and the rest of Telecom's senior management.

Telecom has suffered like Ratners. Almost $2 billion has been wiped from its market value and a state of extreme distrust now exists between it on the one hand and the public and Parliament and the regulators on the other.

This creates a less than palatable future for investors.

As the Business Herald revealed this week, sharemarket analysts unusually cannot reach any kind of consensus on the value of Telecom. Twelve-month share price targets range between $4.20 and $5.90, while recommendations cross the full buy-sell spectrum.

Set aside for a moment the question whether Gattung and chairman Roderick Deane are the appropriate people to lead the company in the future.

Telecom's value is linked to how well management - whoever is in charge - navigates the uncertainties of regulation of its monopoly over the lines connecting homes and businesses to the backbone network.

More to the point, as things stand, it depends on investors taking a punt on the likelihood of the Government following through with its threat of separating Telecom's retail operations from its network business.

Short of actual separation, this question will never be resolved. Indeed, the Government intended this to ensure it always retained some leverage over how Telecom manages its monopoly.

This uncertainty does no good for the company. It pushes up its cost of funds and deprives the share of the qualities long-term investors seek - steady capital growth, stable dividends.

It also does no good for the country. If capital is to be applied to the creaking telecommunications infrastructure, investors will need certainty. The logical decision therefore is for Telecom to do the deed itself. Split itself in two and impose on its network business a clear and fair access regime. Such a step removes the regulatory threat once and for all.

Telecom would also seize what it should have grasped long ago - the initiative.