Telecom set for big give and take deal

By Duncan Bridgeman

Friday 21st May 2004

Telecom could return up to $400 million to shareholders in special dividends late next year, despite a looming large investment in 3G technologies.

The return would be based on Telecom maintaining its single "A" credit rating, which analysts believe will consequently trigger substantial buybacks or special dividends in the fourth quarter next year.

Telecom has indicated it is considering alternative capital management to address any buildup of surplus cash but is not commenting further until its next update.

Any special dividend or share buyback could result in the unusual situation of Telecom then going back to the market to raise further cash to fund its investment in a third-generation (3G) mobile wireless network.

Analysts believe the company will return capital to shareholders after paying down maturing debt up until the fourth quarter next year, noting the repayment of $757 million of Euro Medium Term Notes in April 2005.

That would result in the company having more equity than is needed to maintain its target "A" rating from rating agencies.

"Although this is still five quarters away, if Telecom goes for special dividends, we believe capital returns of 20c a share per annum are plausible," ABN Amro said in a research note this week.

The brokerage's estimate of Telecom's capacity for returns is $400 million.

Forsyth Barr also expects higher returns over the next two to three years.

"If Telecom can hold capital expenditure to $650 million or less in full year 2005, there is a strong possibility it could pay dividends well ahead of its 70% minimum payout policy."

As expected, Telecom downgraded its 2004 capital expenditure forecast from $650 million to $600 million and forecasted $650 million for 2005. That suggests there would be no material 3G spend in that year.

Telecom has repeatedly said it would look to the market to raise equity should it require additional funding for any investment opportunity such as 3G.

The company recently lifted its fully imputed dividend to 7.5c from 5c, a compelling yield story for its many pensioner investors.

This week Telecom received a significant coup, with the government rubber-stamping a Commerce Commission proposal to allow its competitors only limited access to its networks.

It means that rivals get access to Telecom's copper wire network to deliver high-speed internet but promises no full local-loop unbundling.

Critics have slammed the decision not to unbundle, noting that apart from Mexico, New Zealand is the only OECD country not to have done so.

However, Telecom argues unbundling has not been universally productive and a focus on the likes of wireless platforms would be more worthwhile.

Telecom shares gained 9c to $5.66 following the announcement.

Macquarie New Zealand said the unbundling decision was a major uncertainty that Telecom would have wanted resolved before undertaking further capital management initiatives.

"The way is now clear for further announcements on this subject at the full-year 2004 result in about three months' time."

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