Daily ShareChat: Telecom

By Jenny Ruth

Monday 25th October 2010

Uncertainty surrounding the government's ultra fast broadband (UFB) plans are likely to continue to weigh on Telecom into 2011, says Greg Main, an analyst at First NZ Capital.

"Investors should only invest if an adequate margin of safety is present given the potential risks," Main says.

"The key issue is what CFH (Crown Fibre Holdings) recommends to the minister in late October and whether the minister acts on all or part of these recommendations," he says.

Telecom's proposal for participating in the UFB rollout includes an offer to split into two separate companies, a retail arm and its Chorus lines company, and it also hopes for regulatory relief if it does separate.

Whether or not a structural separation will be in the interests of Telecom Corp's shareholders will come down to weighing the cost/benefit equation and any risks in a deal with the government or risks around a compete scenario, Main says.

Even if Telecom doesn't participate in the UFB rollout, there may still be a case for it to separate into two companies, he says.

A separation may lower the regulatory onus on Telecom's retail arm and increase the transparency around Chorus, opening the possibility of it doing deals with UFB winners in some regions or winning UFB regions itself, Main says.

Recommendation: Underperform.

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