KEY POINTS:
Splitting Telecom into three divisions will cost the company up to $115 million a year, its chief financial officer says.
Parliament's finance and expenditure select committee this week recommended Telecom be split into three units covering network access, wholesale and retail.
Telecom's chief financial officer, Marko Bogoievski, said
after the split proposal was announced that the company would spend an extra $20 million to $40 million a year on project management and "unpicking existing systems" to create transparent systems between the separate units.
It would be "more problematic" to forecast capital costs, he said, but he suggested an extra $30 million to $75 million a year would be needed for Telecom's network.
But Bogoievski said these estimates could go up or down by as much as 50 per cent.
Profit forecasts for 2006/7 would not be revised, but the bill did "create some challenges" for the estimation of profit for next financial year.
"The creation of separate units requires more visibility around returns and makes it easier for a regulator to target certain outcomes," Bogoievski said.
But the Telecommunications Amendment Bill was intended to balance competition and investment needs.
"I don't think there are any new challenges, but we do have to demonstrate non-discrimination.
"Where we see a conflict between a wholesale and retail capital expenditure will be dealt with differently and that is where the challenge is."
In May, the Government moved to force Telecom to open its network to rival operators.
The three-way split plan aims to give competitors the same access rights as Telecom's retail division.
Bogoievski said the effect on Telecom's value from the decision lay in its pricing for naked DSL - broadband without a phone - which had yet to be resolved.
After the select committee decision, Goldman Sachs JB Were analyst Andrew White put a potential valuation on Telecom shares of between $2.80 and $4.20, against his current valuation of $4.08.
Telecom was earning "world class margins" from its New Zealand operations.
"It is difficult to avoid the conclusion that this incorporates a portion of monopoly profits that will be exposed under a more transparent operating environment," said White.
The bill would make Telecom offer cheaper prices for competitors to use its network.
Forsyth Barr analyst Jeremy Simpson said its valuation of Telecom was unchanged at $4.55 a share and its recommendation was neutral because there was a degree of "uncertainty" around the wholesale pricing.
Shares in Telecom closed up 1c at $4.52 yesterday, after gaining 4c on Tuesday.
Finance and expenditure select committee chairman Shane Jones is hoping the bill will be passed within the next six days - Parliament's last sitting days this year.
He said Communications Minister David Cunliffe had "considerable authority in contrast to the authority given to the Telecommunications Commissioner five years ago".
"Everyone is aware that Telecom's investment appetite has drooped," he told the Business Herald.
"Provided that the set of rules is well understood and certainty is restored, then the incumbent [Telecom] and competitors can spend less energy on rhetoric and more on investment."
Goldman Sachs' White said the select committee's recommendation for the minister to take charge of Telecom's split would leave the process exposed to "potentially politically motivated outcomes when public support for a split is so high".
