KEY POINTS:
Telecom has made a last-ditch attempt to save its struggling Australian subsidiary AAPT with a takeover bid for network company PowerTel.
The A$357 million ($404 million) bid, which could spark a takeover battle with Optus, would see Telecom add to the $2.2 billion it spent acquiring the loss-making
AAPT in 1999. After a series of writedowns, Telecom now values its Australian business at just $270 million.
Telecom, which has a network access agreement with PowerTel, said it planned to pay A$2.30 a share for the company in a scheme of arrangement which as the support of the PowerTel board.
Chief financial officer Marko Bogoievski said the acquisition of the Australian company would bring together two complementary businesses and was a positive step for the development of AAPT.
Industry observers say a merger with PowerTel is AAPT's best chance to revive its struggling business as it would give AAPT control of Australia's second largest fixed-line broadband network.
Also, if Telecom lost the battle for PowerTel, any recent apparent progress in coming to a strategic relationship with the network company could be destroyed.
The Business Herald revealed last week that AAPT was having talks with PowerTel about a possible merger.
AAPT was put up for sale early last year, but failed to find a buyer.
Bogoievski said the A$2.30 offer price - more than double PowerTel's share price less than three months ago but only slightly above the recent market price - reflected the underlying improvement in PowerTel's performance.
He expected the acquisition to improve shareholder returns within 12 to 18 months.
Telecom's move may spark a bidding war with rival Optus, which would prevent PowerTel and AAPT merging to become a significant third retail fixed-phone line provider after Optus and Telstra. Australian-based ABN Amro analyst Ian Martin said Optus might respond immediately to Telecom's offer.
Bogoievski said he was confident that the scheme of arrangement gave Telecom a good chance of securing 100 per cent of PowerTel.
"In this particular case we have a large majority shareholder in [Hong Kong private equity group] TVG, who we have a good working relationship with and agree an option relationship that gives us a higher level of certainty," said Bogoievski.
Telecom has an option to acquire TVG's 10 per cent stake in PowerTel at a $2.30 per share.
However, the agreement allows TVG to accept a better offer from another party. In a sign of investor disquiet over the acquisition, Telecom's share price dropped 16c to $4.90 soon after the announcement but had recovered to $4.97 by the close of business yesterday.
Observers suggested investors were nervous Telecom may use the proceeds from the sale of Yellow Pages to purchase PowerTel instead of paying out a special dividend.
Bogoievski declined to comment on whether proceeds from the Yellow Pages sale would be used, saying details would be revealed at Telecom's second-quarter results in Auckland tomorrow.
Credit ratings agency Standard & Poor's viewed the plan positively, saying it would improve Telecom's cash flow and give it greater scale.
"The acquisition is expected to ameliorate the cash flow drain of TCNZ's Australian activities and bring greater scale, improving its options for that business," it said.
PowerTel's managing director Paul Broad said it had considered a number of options for consolidation over the past 12 months, but felt a partnership with Telecom was economically and culturally a good fit.
"We had a number of different proposals but that was by far and away the best both for our shareholders, for our people and for the market in Australia," he said.
The transaction is subject to approvals from PowerTel's shareholders and the regulatory bodies.
It is expected that the scheme documents will be sent to PowerTel shareholders next month.
PowerTel shareholders would then have the opportunity to vote on the scheme in late April.
The Business Herald first revealed that Telecom was attempting to take a blocking stake in PowerTel last week and a deal within the month was expected.
Shares in PowerTel closed up 7c at A$2.27.
Combined strength will appeal to market
Telecom is confident that a takeover of Australian network company PowerTel will make AAPT more attractive to the corporate and wholesale market.
Telecom chief financial officer Marko Bogoievski said that under the proposal, AAPT would still manage its retail operations and PowerTel would remain in charge of the network.
PowerTel has the second largest fixed-line broadband network in Australia, after Telstra, and mainly provides wholesale data, fixed-line voice and internet services.
AAPT would have faster access to PowerTel's established next-generation network and would be able to migrate customers to super-fast broadband called ADSL 2+.
Bogoievski expected lower operating costs, a single network and IT infrastructure, and no substantial increase in capital expenditure. PowerTel's broadband network was capable of addressing 45 per cent of AAPT's residential customer base and 65 per cent of the business customer base, he said.
Bogoievski said AAPT would be able to leverage off PowerTel's optic fibre network in Sydney, Melbourne, Brisbane, Canberra and the Gold Coast. PowerTel has also recently expanded to 300 exchanges thought its recent alliance with iiNet.
Telecom chief operating officer Mark Ratcliffe said the company admired PowerTel's strength in infrastructure management.
He said it would be able to take advantage of PowerTel's super-fast broadband.
