Telecom split cost '$200m-$400m'

Mark Ratcliffe. Photo / Sarah Ivey

Telecom's plan to split its network and retail businesses could cost more than $200 million, say analysts.

The country's biggest phone and internet provider released further details of its separation plan yesterday, including how it may divide more than 270,000 fixed assets.

Telecom proposed the breakup as part of its bid for Government broadband contracts, which it won the bulk of in May.

Under the deal, network-operator Chorus will become a separate public company and deploy thousands of kilometres of fibre internet cables in 24 towns and cities around New Zealand.

Telecom will then become a standalone retail business selling phone, internet, IT and some wholesale services.

Despite the plan still needing Government and shareholder approval, the market is betting on its success and Telecom's share price soared to a 21-month high last week.

Telecom shares have gained more than 60c in value since March and almost 30c since it won the broadband contracts two months ago.

Analysts are divided on what the shares will climb to - First NZ Capital's Greg Main predicts they will reach $2.72, while Craigs Investment Partners' Geoff Zame estimates they will be priced at $2.92 in 12 months' time.

Telecom shares shed 2c yesterday, closing at $2.62.

While the proposed separation is doing wonders for Telecom's market value, commentators believed it will be a complicated and expensive affair.

At a rough estimate, Zame said the cost of the split could be anywhere between $200 million and $400 million.

Forsyth Barr's Guy Hallwright estimated the breakup would add $300 million to Telecom's capital expenditure.

According to draft plans released yesterday, the split would see Chorus get the copper network and Telecom most radio towers and mobile phone infrastructure.

The new Telecom would keep ownership of Australian-based AAPT as well as its 50 per cent stake in the Southern Cross submarine internet cable running between Auckland, Sydney and Los Angeles

Despite Chorus being the key player in the Government's ultra-fast broadband scheme, Telecom will keep some of the fibre backhaul running up and down the country.

Although analysts found no surprises in yesterday's release, IDC's Rosemary Spragg said dividing up Telecom's fibre was going to be complex.

"It was in line with expectations but there are definitely some complexities around existing fibre assets and how they're going to be split. We knew that national fibre backhaul was going to sit with Telecom and regional fibre backhaul was going to sit with Chorus but of course there's a grey area of what's national and what's regional and what's central to the [new Telecom] business case," Spragg said.

To confuse matters even more, Chorus and Telecom will be two separate public companies but will still share the use of some services.

Chorus boss Mark Ratcliffe said this was necessary to avoid duplication and waste. "Sharing of some assets, under robust arm's length agreements is a pragmatic and sensible solution."

No indication of what each of the new companies would be valued at was included in yesterday's plan.

Telecom spokesperson Ian Bonnar said commercial information would be released to shareholders in the coming months, before the split goes to a vote.