Infratil's move on Vodafone could still see telco list here

Infratil chief executive Marko Bogoievski.

News that Vodafone New Zealand may be snapped up by investment companies would be a blow for the local stock market desperate for new listings, but the telco could still remain in play even if it does fall under new ownership.

And it's also good to see a New Zealand investment company in the deal room, after fears Vodafone NZ could be sold offshore following its blocked merger with Sky TV back in 2017.

Infrastructure and utility investor Infratil yesterday revealed it was in early-stage talks with another party to potentially acquire Vodafone NZ from its British parent.

Infratil remains in a trading halt and is expected to release further details about the talks in the next few days. The other party is understood to be Canadian investment giant Brookfield.

"The discussions with Vodafone and financiers are ongoing and incomplete, and may not result in a transaction occurring," Infratil said in a statement.

The talks come as Vodafone NZ undergoes a major restructure to improve profitability, and hopes by investors that it would float its shares on the NZX in what would be the first sizeable equity listing in several years.

"Obviously if the trade sale does go ahead it's going to be a disappointment for the market which was looking forward to that Vodafone listing next year," said Greg Smith, head of research at Fat Prophets.

"But it's also a reflection of what's going on in the regulation of the telco space – sort of kill or be killed - and I think the regulators have got a bit to answer for.

"We've seen just this week the [AUstralian regulator] ACCC block a merger between Vodafone Australia and TPG Telecom on the grounds that it would stifle competition when it was actually the reverse. Most countries operate perfectly fine with three operators."

Shane Solly of Harbour Asset Management said while a deal could remove a potential new listing for the NZX, it may require an equity raise or asset sales (or both) by Infratil.

"Hopefully it contributes to a rational telco market in New Zealand," he added.

Another analyst, who declined to be named, said Infratil had demonstrated that it could acquire businesses and then sell down into the public markets.

One example was its acquisition of a 50 per cent stake in fuel company Shell NZ in 2010, with the New Zealand Superannuation Fund taking the other half.

After rebranding as Z Energy that company was listed on the NZX and ASX in 2013, with Infratil and the Super Fund reducing their holdings to 20 per cent each before selling out completely in 2015.

"If it ends up in the hands of Infratil and others then I guess it still ends up in the market in some shape or form but it is a pretty big move on Infratil's part," the analyst said.

"The skill is in the administration, the billing and managing costs. But if this does play out this way, it's far better than it disappearing offshore."

A report in the Australian Financial Review suggested the Vodafone acquisition could be structured as a 50:50 joint venture in a deal thought to be worth A$2.5 billion ($2.65b), although documentation released during the failed Sky merger valued Vodafone NZ at $3.44b.

For 2017 (its most recently reported financial year), Vodafone NZ made a profit of $57.5 million, turning around a loss of $18.3m. Revenue increased 2.8 per cent to $2.05b.

Vodafone chief executive Jason Paris has set about making the telco a more attractive proposition, by taking an axe to costs, then seeking new digital opportunities.

In February Paris told the Herald that as a proud Kiwi, he would like to see his company listed on the NZX but said the decision could well be made higher up Vodafone's global foodchain.

Asked then if the company was being positioned as a growth or value stock he said:
"I'd like to think both, right? It's good to have your cake and eat it, too. But the reality is we're in a very competitive industry where low single-digit revenue and margin growth is the norm. So a yield and dividend stock is where we'll be positioned initially."

Good fit for Infratil

Buying into Vodafone would not be Infratil's first tech investment.

In 2016 it bought a half share in Canberra Data Centres (CDC) for A$392m and a year later invested a further A$50m to help fund its growth.

Last month Infratil said the value of its 48 per cent stake in CDC had risen from $487.8 million to $841-$942m.

And when Vocus put its NZ assets (Orcon, Slingshot) on the block, Infratil was one of the rumoured bidders. The Vocus board eventually ended the process without a buyer.

Fat Prophets' Greg Smith noted that Infratil chief executive Marko Bogoievski was one of Theresa Gattung's top lieutenants at Telecom before he left in 2007, so has experience in the telco market.

"Vodafone is a good cashflow generator, it fits well with Infratil and makes a bit of sense … even though there is competition, it does have a dominant position, is number one in mobile and two in broadband.

"And it's not like there's going to be a whole host of new disrupters coming into our market."