TelstraClear rethinks network strategy

By PETER GRIFFIN Telecoms Writer

The country's second largest telco, TelstraClear, has entered the New Year with a dose of reality, pledging to stem losses by striking deals with Telecom and sharing infrastructure with competitors.

But no reduction in the company's $1.1 billion, five-year network expansion plans is on the cards and doubts linger over its residential strategy, causing analysts to remain nervous about its future.

Chief executive Rosemary Howard said pressure from the company's majority shareholder Telstra and 38 per cent stake-holder Austar had forced a strategy rethink.

"The financials are not good enough for our shareholders in the current environment. "

Rather than building its own infrastructure to avoid tangling with Telecom, TelstraClear would increasingly seek wholesaling agreements with its dominant competitor where the merged TelstraSaturn and Clear networks would not reach.

Ms Howard said: "Do we invest and build our own [broadband] service, or do we resell Telecom's?

"While we stimulate demand and provided we can get a reasonable margin on it, we'll resell and concentrate on sales and marketing."

A residential wholesaling deal allowing TelstraClear to deliver high-speed internet and telecoms services to customers is most likely in Auckland, where TelstraClear's plans to extend its network beyond the central business district are no closer to being realised.

Ms Howard would not comment on the status of legal action with Vector, the lines company whose poles TelstraClear wants to use to string cables across Auckland.

But she said TelstraClear's moves to secure resource consent from the region's councils to allow the network roll-out had been ramped up in November.

She would be "very disappointed" if approval to expand in Auckland was not forthcoming.

A report from Deutsche Bank analysing the merger said Telstra had a good opportunity to improve its franchise in New Zealand but capital expenditure requirements continued to raise concerns.

"While we believe that there is potentially an exciting opportunity for Telstra in developing Clear," the report said, "we are sceptical that TelstraSaturn's residential telephony and cable will ever earn its cost of capital.

"We need only look at the historical returns in the New Zealand market."

Deutsche Bank said Clear and TelstraSaturn had independently spent around $970 million over the last four years, but total ebitda (earnings before interest, tax, depreciation and amortisation) over the period was just $21 million. Ebitda for $29 million for the year was forecast.

"The combined TelstraSaturn business is expected to continue to generate an average loss of $180 million per annum over the next few years."

Meanwhile, Project Tuitui, TelstraClear's restructuring programme, steams on, and is expected to be completed in the middle of next month. By that stage, a clear picture of the redundancies the company will make should emerge.

TelstraClear this week appointed John Hooper as chief financial officer.