TelstraClear sale to Vodafone stirs speculation about Telecom NZ

Telstra may be "clearing the decks" from a regulatory standpoint, says Gartner analyst.

Telstra has agreed to sell its New Zealand business TelstraClear to Vodafone NZ for A$660 million. The deal could be a precursor to a later Telstra takeover of Telecom New Zealand, a Gartner analyst said.

The Vodafone acquisition includes TelstraClear’s voice and data services, network infrastructure and New Zealand customers. Vodafone NZ said the deal will strengthen its fixed communications services, especially for business customers, and “complement” existing mobile services.

Telstra will return A$380 million in cash to its Australia operations through a pre-completion dividend. Telstra said sale proceeds “will be incremental” to its predicted three-year excess free cash flow of $2 to $3 billion. “Subject to completion adjustments, Telstra will also record an accounting impairment of approximately A$130 million in FY2012, and an additional impairment of approximately A$130 million in FY2013 which is largely due to unrealised foreign currency losses.”

“The deal is a natural one, bringing together TelstraClear’s fixed telecommunications and data products and corporate client-base with Vodafone New Zealand’s mobile offering and retail customer-base,” Telstra CEO, David Thodey, said in a statement. “The transaction is consistent with Telstra’s overall strategy and capital management framework that we outlined in April.”

“The two businesses are very complementary and, when combined, will enhance our ability to meet the communications needs of customers from the Far North to Southland,” Vodafone NZ CEO Russell Stanners said in a separate statement. “The transaction is expected to create significant cost and capex savings from a combination of the two companies’ networks, commercial operations and administrative functions. If approved, it will create a new force in the New Zealand market in readiness for the ultra-fast broadband roll out, providing customers with a full suite of fixed and mobile telecommunications products.”

Telstra may be “clearing the decks in the regulatory context” so that it can later take over Telecom New Zealand, Gartner analyst Geoff Johnson told Computerworld Australia. “Given its free cash flow forecast for the next few years … the scale is something they could entertain. Whether it makes corporate sense is another thing.”

“Telstra is well enough organised … to make sure that it puts this one place first without making some kind of hairy offer for Telecom New Zealand and then maybe solving the regulators’ issues,” he said. “You do it up front [and] that’s a nice clean deal.”

"We do not intend buying Telecom NZ," a Telstra spokeswoman responded.

BuddeComm analyst, Paul Budde, said Telstra no longer had a need for TelstraClear. “Telstra had more of a defensive role” owning TelstraClear because Telecom NZ owned AAPT in Australia. “With [Telecom NZ] selling AAPT there was no longer a need to hold on to TelstraClear.”

Telstra has exited a difficult position in New Zealand, while Vodafone is now a worthy rival to Telecom New Zealand in both mobile and fixed, Ovum said. “The market will become more rational following the sale of TelstraClear, with two large integrated and scaled operators, alongside smaller value-seeking players to keep competition alive and well,” said Ovum analyst, David Kennedy.

The deal requires regulatory approval by the New Zealand Commerce Commission, Overseas Investment Office and the Ministry of Business, Innovation and Employment. Telstra estimated getting regulatory approvals would “take a number of months,” while Vodafone New Zealand said it expects to complete the acquisition in Q4 2012.

The Telstra/Vodafone deal “will complete” with no great difficulty, Johnson predicted. “This is the market preparing for more complete service offering” combining mobile and fixed data services.”

But in a recent blog post, Budde said there could be “significant scrutiny of the possible deal” because it could portend Vodafone domination in NZ. “If Telstra does not take over Telecom it is hard not to conclude that Vodafone will become the long-term dominant player in the New Zealand market.”

“But the government and the Commerce Commission will also need to accept that the New Zealand market does have competition limitations,” Budde said. Perhaps some stringent wholesale/resale clauses and sharing of mobile infrastructure with companies such as 2Degrees will be attached to the merger.”

“On the other hand, if Telstra is indeed going to take over Telecom the market dynamics in New Zealand could be strengthened, and such a comprehensive scenario might be more attractive to the regulator,” Budde said. “One difficulty will be that a more efficient operation will involve fewer people and – be it short-term or long-term – the merger will have a negative effect on the people currently employed within Telecom; and that, of course, will have some political implications.”

Follow Adam Bender on Twitter: @WatchAdam

Follow Computerworld Australia on Twitter: @ComputerworldAU, or take part in the Computerworld conversation on LinkedIn: Computerworld Australia

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