New Telecom tipped as takeover target

The 'New Telecom', likely to be the third biggest company on the NZX is likely to also be a takeover target, say sharemarket analysts. Photo / Greg Bowker.

The New Telecom company formed when the Chorus network business is split from Telecom in November will be the third-largest company on the NZX and will be a takeover target, according to fund managers and the independent report on the separation.

Telecom, New Zealand's largest telecommunications company, is a widely held stock that has been protected from takeovers because no shareholder can own more than 10 per cent and no foreigner can own more than 49.9 per cent without government and board permission.

The ownership restrictions in the Kiwi Share will not apply to New Telecom but will remain for New Chorus.

"New Telecom will not be subject to such ownership restrictions, which will enhance its attractiveness from a potential takeover," independent adviser Grant Samuel said in its report, which found the separation was on balance in the best interests of shareholders.

"The size of the company and the existence of the Kiwi Share have restricted the potential takeover interest in the company," Grant Samuel said.

Some fund managers say there has been market chatter about potential suitors but they aren't expecting immediate corporate activity on separation.

The contrary view is that a takeover is unlikely because rivals are preoccupied with regulatory issues in their own countries, New Telecom is still a big swallow and it has to prove its worth as a service provider that just connects to the network like anyone else.

"There is definitely potential for corporate activity in Telecom after the shareholder cap was removed," Guy Elliffe, fund manager at AMP Capital Investors, said.

The possibility of someone acquiring a strategic stake was something that was being discussed in the market, he said.

Shane Solly, portfolio manager at Mint Asset Management, said that as a defensive stock New Telecom was attractive to investors. The removal of the cap would be helpful as anything that constrained the normal operation of markets was a negative factor for investors.

He said his company had not been a heavy investor in Telecom for a long time but in the past 18 months it had become keener on the stock.

"Takeovers are an important mechanism by which shareholders can realise value in excess of share market prices as bidders will typically pay a premium to acquire control. Impediments to a takeover are generally negative for shareholders," Grant Samuel said.

Telecom has 38,000 shareholders and 1.9 billion shares on issue. Substantial shareholders - those with holdings or more than 5 per cent - hold just 14 per cent of the shares.

Schroder Investment Management Australia Ltd., which had an 8.3 per cent holding at September 5, declined to comment on the investment.

As at August 19 holders of American Depository Receipts listed on the NYSE, which each represent five ordinary shares, held approximately 15 per cent of the shares.

The New Zealand Superannuation Fund has been directed by the government to identify opportunities to increase its allocation to New Zealand assets. It had $120.7 million invested in Telecom at Aug. 31, up from $117.4 million at June 30.

The scheme being considered by Telecom shareholders at the annual meeting on October 26 gives them one New Chorus share for every five Telecom shares held to facilitate a spinoff of the network business.

The same shareholders will initially own the separated entities in the same proportions and there will be some jockeying in initial trading as shareholders form views on each business and adjust their holdings.

New Telecom is expected to be the third-largest company on the NZX and New Chorus the eighth largest based on estimated market capitalisations, Grant Samuel said. New Telecom will be in the MSCI World Index but New Chorus is unlikely to be.

Telecom was formed in 1987 when it was separated from the New Zealand Post Office. It was sold by the government in 1990 for $4.25 billion and listed on the NZX, ASX and NYSE in 1991.

Immediately prior to the separation announcement, Telecom had a market capitalisation of approximately $4.4 billion based on a share price of $2.28. The shares rose 2.8 per cent to $2.60 today.

Grant Samuel said that the size of New Telecom may limit the number of potential acquirers but the separation removed a perceived complexity of vertical integration in Telecom's current form.

"The relief from regulation that is a by-product of the proposed separation for New Telecom will be viewed favourably by the investment community as well as potential acquirers of the company," Grant Samuel said.

Guy Hallwright at Forsyth Barr doubted that the removal of the shareholder cap would create any immediate takeover activity. Telstra was struggling to come to grips with its own industry situation. He said investors had to come to grips with what kind of company New Telecom will be.

"It is basically a service provider," he said.

Telecom expects to demerge Chorus by November 30 if approvals are obtained.

Grant Samuel said that while some demergers created substantial value, others did not.

"In the end, the success of demergers depends on the specific circumstances of each case."