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Telecom split may cost up to $150M but benefits could be $500M

Tuesday 13th September 2011

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Splitting Telecom Corp. into its retail and network businesses may cost as much as $150 million though the estimated benefits of the plan are more than three times as great, company documents show.

A shareholder booklet on the demerger of Telecom and its Chorus network business put restructuring costs at between $85 million and $120 million, including fees for lawyers, accountants, corporate advisers and communications. A further $20 million to $30 million may be spent on separating the IT systems.

“It’s not hugely material, but it is a cost,” chief financial officer Nick Olsen told analysts on a conference call today.

Still, those costs are far outweighed by the benefits of Telecom splitting its business, letting the new retail arm shed its regulatory burdens and providing Chorus with a $929 million injection to build the majority of a nationwide broadband network.

Independent adviser Grant Samuel said the value of cooperating with the government and carving up the business was some $500 million, or 28 cents per share, in its report on the demerger.

“The difference can be attributed primarily to the investment from the Crown (effectively a form of subsidisation due to the Crown Fibre Holdings (CFH) debt being non-interest bearing, and the CFH equity securities being non-dividend bearing for a defined period) and the benefits from not competing with a second high speed network,” the report said.

If Telecom decided to compete with a government-backed rival, it would have a “destructive outcome” for both companies, ultimately eroding the value of the two competing fixed-line networks.

Chief executive Paul Reynolds, who unveiled his $5.2 million pay packet on Friday during the Rugby World Cup fanfare, told analysts shedding the regulatory burden is a “big benefit,” and competing against a government funded rival wasn’t in the long-term interests of shareholders.

Shareholders will vote on whether to split the company at next month’s annual meeting, and Telecom aims to split the company from Nov. 30. Once the demerger is complete, eligible shareholders will get one Chorus share for every five Telecom shares.

The phone company won the lion’s share of the government’s broadband rollout after proposing structural separation in a bid to shed the heavy regulatory burden of operating a copper-line network monopoly, and win tax-payer funding to build a nationwide fibre network.

That bid was successful, and Chorus won $929 million of the $1.35 billion on offer from the government to roll-out an ultra-fast broadband network. Chorus expects it will have to spend $470 million and $670 million of its own money over the next eight years on construction.

Once the split is complete, New Telecom will be the bigger of the two companies, with adjusted pro-forma earnings before interest, tax, depreciation and amortisation of $1.125 billion on $5.1 billion of sales in the 12 months ended June 30, while Chorus made $676 million on $1.1 billion of revenue.

The shares rose 0.6% to $2.48, and have gained 16% this year.


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