Between the lines: Borders crossed by telco schemes

With its share price at low levels, Telecom should be a takeover target or a break-up story.

Neither is likely in the short term. The Kiwi share will fend off would-be predators, since the Minister of Finance's approval is required for a single shareholder to own more than 10 per cent. And even a modest break-up is on hold, with Telecom turning coy on partial floats of its high-growth business units.

The reasons for Telecom's poor share price are well known. Putting aside global market sentiment, it has reached the point where niche competitors have chewed into traditional operating margins, leaving it no choice but to invest in new growth areas whose returns are still some years away.

It is not alone among incumbent telcos in seeking ways to revitalise its business. Since most have outgrown their home markets, it is natural to look overseas.

Telecom's largest investment has been in Australia's AAPT.

Australia's Telstra has taken a half share in New Zealand's Telstra Saturn, but that is small beer beside the $A6.5 billion it has agreed to put into Hong Kong's Pacific Century CyberWorks so it can gain an internet foothold in Asia.

While Telstra is pointing itself at Asia, Macquarie Equities of Australia views Telecom and its 80 per cent-owned subsidiary, AAPT, as an important player in an inevitable consolidation of the Australian market.

In fact, Macquarie considers Telecom more likely than Telstra to be a "consolidator" in the Australian market, despite the latter's importance in the convergence with media.

The second largest Australian telco, Cable & Wireless Optus, is less likely to be a consolidator, because its British parent is regarded as ambivalent about its long-term commitment.

Indeed, Macquarie suggests Optus might even be broken up, through trade sales or public offerings of its mobile or consumer/multimedia divisions.

In such circumstances, AAPT would be an obvious buyer if it can get round Australia's competition watchdog, the ACCC, which has already blocked Optus from taking over AAPT itself.

In New Zealand, Telstra Saturn looks the obvious contender for the consolidator crown. Before they were merged, both Telstra and Saturn bought internet service providers.

But internet-strong Clear Communications is an even better fit since it has complementary switches and network that would save Telstra Saturn the trouble of building its own. Indeed, before Telstra threw in its lot with Saturn, it unsuccessfully negotiated to take over Clear.

For the moment, British Telecom is backing Clear with large dollops of new capital. But like Cable & Wireless in Australia, its long-term commitment must be in doubt, and the longer it waits, the greater the likelihood New Zealand's competition law will change to mirror Australia's. With that comes the risk that Telstra Saturn would be barred from buying.