S&P warns Telecom over prospect of structural separation, shares sink

Monday 24th May 2010

Telecom Corp.’s potential to carve out its network business in a structural separation could result in a downgrade of its ‘A’ credit rating, says Standard & Poor’s.

The ratings agency revised the outlook on Telecom’s credit rating to negative after the phone company said it was considering selling down its network stake at a time when it’s facing “operating and competitive challenges” in its mobile business, and its information technology and Australian businesses will become bigger contributors to earnings.

The shares sank 2% to $1.95, a new low since the early 1990s when it was a fledgling company on the stock exchange.

“We consider TCNZ’s (Telecom Corp. New Zealand) vertically integrated business model to be a key driver of the group’s strong business risk profile,” said credit analyst Paul Draffin in a statement. “Any separation of the fixed-line access network will have a material negative impact on TCNZ’s business risk profile.”

Outgoing chief financial officer Russ Houlden announced a change to Telecom’s 2011 dividend policy to help it keep its credit ratings with S&P and Moody’s Investor Services after it was downgraded by Fitch Ratings Agency in April.

S&P warned it could cut Telecom’s rating over the next 12 to 18 months if the phone company agrees to structural separation, its financial profile deteriorates, or if there was a significant shift in its earnings mix to lower-quality sources.

Prime Minister John Key talked down the likelihood of the government taking a share in Telecom’s Chorus unit, saying he “wouldn’t describe that as accurate” when asked at his weekly press conference.

In exchange for mulling structural separation, Telecom is looking to shed three of the undertakings it’s required to complete by the end of the year under its enforced operational separation, saying they should fall under the government’s ultra-fast broadband initiative.

Communications Minister Steven Joyce welcomed Telecom’s move, calling it “positive” and said there were other applicants for the tender that had raised potential regulatory issues, without naming them.

Businesswire.co.nz

Comments from our readers

No comments yet