Key Points:

Pacnet is thought to be offering US$420 million ($794 million) for AAPT as it looks to complete its Asia-wide telecoms network, says a Reuters report citing a source close to the companies.

The news did not have a material effect on the company's shares, which fell as much as 11c or 4.7 per cent shortly after opening, in line with the wider sharemarket affected by a slump on Wall St overnight. But they rallied later in the day, and at one point were up 2c, before closing at $2.34, up 1c.

Market commentator Arthur Lim said the investment community was still somewhat cynical about the offer's validity - especially given the 40 per cent premium on analysts' valuations.

But the rumour was not being dismissed completely, he said.

"If ever there is a time for a player that's trying to build up a regional Asia Pacific type network, now is the time that you make those kinds of moves."

Telecom bought AAPT in 1999 for $2.2 billion, but a series of writedowns has left the third-largest phone company in Australia with a book value of just $270 million.

A bid to offload the Australian operation failed to find a buyer, and Telecom made a further investment across the Ditch, paying A$357 ($423 million) for network company PowerTel in a bid to bolster AAPT's reach.

Telecom spokesman Mark Watts said yesterday the Reuters report was "speculation", but did not dismiss it outright.

"We don't comment on speculation - that's a long-standing policy - and we are committed to our AAPT business in Australia."

Asked if the company had had any contact with Pacnet, Watts said, "We're not going to comment on the speculation on that, or any other issue that's implied in the article."

Lim said Telecom faced significant capital expenditure requirements, with plenty of focus needed on its New Zealand market after separation.

"It will be good for Telecom's short term, from a financial point of view, because they are reasonably stretched. Also from a management focus point of view, I think their focus has to be on establishing a very, very strong position in New Zealand, rather than having their efforts dissipated on a few fronts."

But Lim said that longer term, a divestment would raise the question of where Telecom could gain growth.

"But I think for most investors in Telecom, that's really the last thing on their mind at this stage."

First NZ Capital analyst Greg Main believed that there was a low probability of a sale at this stage.

"It's probably a good offer, I would think, in the current market conditions, but whether it actually satisfies Telecom's management and its strategic consideration for the AAPT business could be another matter."

He said Telecom was not particularly debt-laden, so would not need to realise cash fast.

At its annual meeting in October, Telecom told shareholders its funding was secure, and it had seen little effect from the global downturn.

One analyst who asked not to be identified said a divestment could still be a possibility - if the price was right.

"At this point, it really just looks like speculation ... It's one number, you don't know what's in it, and without knowing how it will add value to whoever the buyer might be, it's hard to say."

Reuters reported that Pacnet, formed this year from the merger between Asia Netcom and Pacific internet, would finance its unsolicited offer with cash and equity.

AUSSIE ARM

* AAPT is the third-largest phone company in Australia.
* Bought by Telecom for $2.2 billion at the height of the dotcom boom in 1999.
* A series of writedowns has seen its value fall to just $270 million.
* Telecom bought Australian network company PowerTel last year for A$357 million, coupling it with AAPT in a bid to extend its reach.
* AAPT's underlying ebitda for the three months ending September 30 was A$13 million, down 24 per cent - a fall Telecom attributed to lower revenue and set-up costs from moving call centres to Australia.The market has reacted coolly to speculation Asian telco giant Pacnet could be interested in Telecom's ailing Australian subsidiary AAPT.