Telecom NZ Risks Split, Analyst Says

Australian telecommunications analyst Paul Budde says Telecom New Zealand Ltd. will either be taken over, split up, or both, as early as next year. The prediction is part of Budde's latest annual report on the New Zealand telecommunications industry.

Telecom is in a "desperate" condition, he says. "Profits are going down and revenues are not rising. This wasn't a problem when it was owned by government; no-one really cared." But now it has shareholders with no special feelings towards New Zealand and "money at their heart."

"They will say 'break it up into parts so it can compete better in each area'." The sum of the parts will be worth more that the whole to the shareholders.

Telecom has "already made noises about splitting off some of its operations, with possibly mobile becoming the first division that will be spun off," Budde says. He thinks that's the wrong way of going about it.

"Retail, wholesale and infrastructure are the incompatible businesses. Mobile is an integral part of infrastructure." Mobile should be kept with the rest of the infrastructure company, he says. He suggests the shareholders could force a split along the lines he advocates.

Telecom's degree of vertical integration has been holding it back, Budde says.

"Vertically integrated companies are notoriously unfocused. They try to be all things to all people and in the process fail to make the right decisions. They end up as mediocre companies with mediocre services."

He cites several practical pitfalls of Telecom's vertically integrated incumbent status, notably its failure to grab the opportunity of its five-year lead in mobile telephony.

"Financial institutions used not to care. The telcos were cash-rich, and the investors loved that. They didn't understand about telecoms, and the telcos got away with murder. Now they do understand, and they're beginning to ask 'what are you doing, and is there a need for some new business models here?'" A split Telecom will have a sharper focus on each group of services and its rivals in each market, he says, and will move more competently into a competitive market with increasingly sophisticated user needs driven by e-commerce, digital information and e-entertainment. As its share price declines, Telecom will find itself a target for takeover by larger multinationals, Budde says. Splitting into smaller more focussed entities will not necessarily prevent that.

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