Telecom says future so cloudy it can't give guidance

By NZPA

Thursday 3rd May 2007

Telecom today declared a $1.1 billion share cancellation at its third quarter report but said its future is so clouded it can't give guidance on earnings or spending plans.

Chairman Wayne Boyd today said the board would consider breaking up New Zealand's most valuable public company, rather than accept the three-way operational split the Government has proposed.

Boyd today flatly rejected the Government plan as unworkable.

Asked how Telecom would respond if its counter-proposed to sell off its network to a third party was rejected, Boyd wouldn't say.

"We are quite staunch about this. Their proposal won't work.'

When Brook Asset Management manager Simon Botterway suggested that under proposed regulatory structure it might be time to break Telecom up and auction parts off, Boyd agreed that was an option.

He said the current "game" had to be played out while "meaningful" discussions were ongoing.

He added: "You are perfectly right. Any responsible board would consider the future quite carefully in terms of the group of assets that are under its stewardship if the worse setting actually eventuated."

Outgoing chief executive Theresa Gattung normally gives a profit forecast following the third quarter result but said she couldn't because of the uncertainty.

"We are saying that given the fluidity of the situation, we're not able to give explicit guidance for next year," she told a media briefing.

"There are simply too many moving parts at the moment to be able to be clear about either the operating outlook or the capital for next year."

The best she could offer was that profit would be in line with the third quarter "run rate". The March quarter net profit rose to $238 million against $222m a year earlier.

That lifted the nine-month net profit to $960m and put it on trace for a full-year profit of $875m-895m, excluding the one off $2.24 billion sale of its Yellow Pages division.

Chief financial officer Marko Bogoievski said it was extraordinary that six weeks from the start of a new financial year Telecom was unable to confirm its capital spending plans.

"That's the result of this level uncertainty."

The share cancellation was expected to happen in late September.

At today's share price of $4.87, Telecom is capitalised at just under $10 billion, so just over one in 10 shares will be cancelled.

Despite Australian media speculation to the contrary, there was no announcement on a replacement for Gattung, who quits in June.

Boyd said he had a comprehensive shortlist of external and internal candidates and was on target to announce an appointment by June 30 as planned.

Front runner, Bogoievski told NZPA last month he was unsure he would even put in for it until it was clear how the restructured company looked like.

However, Boyd said all candidates knew the position was fluid.

He said the capital return allowed for future investment in broadband, new mobile technology and still allowed financial flexibility.

While Telecom was not on "capital strike" as TelstraClear apparently was, it would not invest in new broadband technology unless it could get a fair rate of return, he said.

"Now is not the time to validate a process that steadfastly refuses to acknowledge the issue of investment," he said.

Botherway said the earnings outlook was "somewhat disappointing" and he questioned Telecom's capital spending which this year will be around $825m.

"I believe Telecom needs to have a good hard look at its capex plans. They simply look too high in light of the operating outlook."

Group earnings before interest, tax, depreciation and amortisation (Ebitda) for the quarter fell 3.1% to $507m and New Zealand operations are expected to be down around that level for the full year, mainly due to the harsher regulatory environment.

Today's announcement is the anniversary of the Government's decision to force Telecom to open its network to broadband rivals -- a move that at one point shredded 30% off Telecom's value.

Forsyth Barr broker David Price said the result was slightly below his firm's expectation with the mobile result a negative, despite Gattung saying it was strong.

The $A9m ($NZ10.2m) loss from AAPT was not as bad as feared while the capital return was as expected.

"There was nothing untoward anywhere. There was also nothing there to push the price forward," said Price.

"The bigger game in town is Netco and until that's sorted out it will preoccupy people's investment decisions."

The company declared a 7 cents per share quarterly dividend, down from 9.5c a year earlier, but in line with guidance.

Telecom shares were unchanged on $4.87 in late trading.

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