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Shareholders: 'Sacrifice Telecom to spice up market'

By Ray Lilley

Friday 17th March 2000

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A longtime institutional shareholder in Telecom is pushing for the telco to unbundle and float its "new economy" internet and mobile phone businesses to help unlock value.

British-based Henderson Far East Income Trust, a stockholder since Telecom was privatised in 1991, said the move would provide sparks for the lacklustre local share market.

New "point 'n click" listings would add spice to the local market's investment mix, since New Zealand was not seeing the emergence of the new economy stocks which were fuelling other markets.

The proposal would also reduce the dampening effect of Telecom's large size in the local equity market. Telecom makes up 31% of the total market.

"There are a lot of attractive new businesses inside Telecom. I can see pressure building for these strong 'new economy' businesses to be listed independently of Telecom to establish their strong value on a clearer basis," Henderson Trust director Michael Watt said.

Floating off Xtra and Telecom's mobile services "might attract money into New Zealand and keep some here," since such high-tech-based businesses are elements not visible in the local stock market.

"There is a lack of new-economy opportunities here at the moment," he said.

"Telecom's recent performance has been quite flat. And it's such a big slug of the market, it [virtually] determines the rest of the market."

That, combined with a lack of offerings in New Zealand to attract investors rushing into technology stocks, meant the local market was not flowering and flourishing.

Other Asian equity markets, some tech-stock-based, are performing well as investors seek out high-value new- economy stocks.

The Income Trust recently sold down its DB Group stocks and has just 8% of its holdings in solid-yield local shares, with what Mr Watt calls an overweighting in media companies Sky and INL. He hoped Sky's performance would soon change for the better.

While New Zealand had consistently produced the highest yields across Asia for the Income Trust (an average of about 6%), its capital growth performance had been disappointing, leading the investor to reduce its exposure here.

The poor results had been further affected by a weak kiwi dollar.

"We can't afford to have that drag," and its 15% of investments had been cut virtually in half in recent months.

Bullish about Asia, which will see average growth of 6% across the region this year, he said it had come a long way quickly since the mid-1997 crisis first broke, and is recovering quickly.

The Australian and Hong Kong stock markets have fully recovered to their pre-crisis levels.

Others like Taiwan, Korea and Singapore are driving ahead rapidly, with tech stocks, computer-based businesses, internet access and mobile communications major themes in these markets.

Only Thailand, China, Indonesia and Malaysia lag behind New Zealand, which was back to around 58% of its pre-crisis level.

High-growth new listings coming on to Asian markets were attractive to investors.

"If high-tech stocks go off the boil, we may come back to the [sound] fundamentals and yields in New Zealand."

While there was a lot of hype around new-economy stocks, they were being supported in markets like Taiwan, Korea and Hong Kong by subsidiary exchanges that allowed capital to be injected into new companies at an early stage.

There was no shortage of capital for equity investment in Asian markets and this matched a significant level of pent-up development demand in many countries.

Asian markets are much stronger and working much better as a result of the reconstruction of their rules and regulations, partly shaped by western input.

The corporate, financial and investment sectors had undergone major change in economies like Hong Kong, Singapore and Korea.

Confidence was being renewed, with some global investors switching back into Asia.

"It's starting to be recognised as a high-growth opportunity again," by fund managers in the UK and the US.

While there were still debt problems, places like Japan can only resolve those issues over time without doing damage to the social structure of the society.

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