Split more likely for Telecom

British Telecom's profits rose after its voluntary unbundling under pressure from the industry regulator. Picture / Reuters

A visit by several senior Telecom executives to British Telecom shows the New Zealand company is considering following BT's lead and splitting into separate wholesale and retail arms, analysts say.

Telecom confirmed yesterday that networks head Mark Ratcliffe, government relations manager Bruce Parkes and other executives had visited BT last month.

Analysts say the trip signals Telecom is seriously considering the implications of structural separation of its business.

Paul Budde, an independent telco analyst, said the visit was positive because it showed Telecom was looking into separation.

"The structural separation at British Telecom was positive for the company," said Australian-based Budde.

"If Telecom is serious about achieving it, then they can look at British Telecom, beyond the monopoly, and see how separation can happen successfully.

"If Telecom positions itself in the right way through a separation process, it could be in the position of being the lead in the internet economy. They have a couple of years of pain in front of them, but there is no gain without pain."

Indeed, BT has shown a modest rise in profits since the company voluntarily split its wholesale and retail operations in September last year under pressure from Ofcom, the British communications regulator. Telecom senior executives visited Ofcom as well.

BT formed a wholesale business, Openreach, which opened in January and sells network access to its competitors on similar terms to its own retail arm.

In the March quarter, its revenue was up 7 per cent to £5.1 billion ($14.9 billion) and its earnings before interest, tax, depreciation and amortisation rose 1 per cent to £1.5 billion.

The company also won 30 per cent of new broadband connections in Britain over the quarter.

BT said the gains were evidence its "strategy of embracing change is working".

Telecom visited BT shortly after Helen Clark's Government said it would break Telecom's monopoly over its phone network - the so-called unbundling the local loop.

Communications Minister David Cunliffe has effectively put Telecom on notice that it must embrace change, saying the Government was also studying the desirability of structural separation.

Government officials will report to Cunliffe by December next year about whether Telecom should be directed to separate the company.

Clark said last month she would like Telecom to follow BT's lead.

"I've been quite clear that I believe that a more positive and proactive attitude towards competition, such as that taken by British Telecom when it voluntarily separated its company, would have been good for Kiwi shareholders," the Prime Minister said.

Tyndall Investment Management domestics equity manager Rickey Ward said he believed Telecom was heading towards structural separation already.

"Telecom has to grapple with many aspects in separation but it seems to be going in that direction," he said.

Other analysts believe Telecom will not submit to Government pressure to voluntarily separate.

A telecommunications analyst, who did not wish to be named, said it was highly unlikely Telecom would separate until significantly pushed to do so by the Government.

He believed separation would have a major impact on the company's profitability.

Telecom shares closed down 5c yesterday at $4.39.

British Telecom

* BT split its retail and wholesale arms in September last year.

* It created wholesale retailer Openreach, which sells network access to its competitors.

* Operating earnings jumped 1 per cent after separation.