Telecom's threat a hollow one

Market weighting means share price drop wouldn't have the impact Telecom says

Telecom's threat that the share market would tumble should the government endorse unbundling of its network is a spurious argument, says one financial expert.

The Dominion Post reports that a letter from Telecom chief executive Theresa Gattung to then minister of communications Paul Swain, dated May 5 last year, warns the government that "20% of the share market is at stake" and that unbundling would wipe 30 cents off Telecom's share price.

However one analyst has called Telecom's bluff, saying the impact would be far less.

"The market is weighted and even though Telecom is a large part of that market, the impact of such a shift would be far less," says the analyst, who did not wish to be named.

Telecom's share price at close on Thursday was $5.69 a share. A drop of 30 cents per share would equate to a fall of 5.3%.

However the impact on the NZX 50 would be far less. Because of the way the market weights each company, the overall impact would be only 1.3%.

"That's large, but not unheard of. In the past two weeks we've seen at least one day where the market dipped by that amount."

The analyst goes further and suggests that because unbundling would increase the number of competitors, he would expect prices for telecommunication services to fall overall.

"The impact of that would be, potentially, to decrease costs for businesses so the share price for those companies could rise." That might balance out some of the loss if not all of it, suggests the analyst.

Gattung's letter says the 30 cents per share drop is based on a Macquarie Research Equities report, dated 30 April 2004. Macquarie Research has recently reported that Telecom's current share price is undervalued and should be closer to $6.40. A reduction of 30 cents a share would still put the share price higher than it is today.

Gattung states in the letter that she struggles to see why it would be in New Zealand's interests shift the value of Telecom's stock to "an Australian company" — TelstraClear, which Telecom says would benefit the most from local loop unbundling.

Telecom would also not build a next-generation network, Gattung says, and instructed Swain as to how the government should proceed with the regulation.

Commenting on what Gattung had written, TelstraClear's CEO Alan Freeth says that Telecom's threats raise serious questions about what he terms is the manipulation of the government by the incumbent telco. He expresses concern that the manipulation may happen again, to stave off regulation unfavourable for Telecom.

Freeth says the government should act immediately and proceed with unbundling. According to Freeth, the regulatory environment in New Zealand has prevented TelstraClear from investing in the country. Gattung's letter to Swain says that if the government accepted the Commerce Commission's recommendation of an Unbundled Bitstream Service (UBS) and Unbundled Partial Circuits (UPC) in lieu of local loop unbundling, TelstraClear would have "an almost immediate way forward to build its broadband offerings and increase its market share."

However, a year later TelstraClear still has no UBS offering to onsell. TelstraClear felt that the terms of Telecom's commercial proxy UBS were poor and filed an application with the Commerce for a regulated UBS instead, in the hope that the regulator would stipulate an improved service.

A decision on the regulated UBS was due out in November but Telecom is currently challenging aspects of the Commission's determination in the High Court. It is not known how long the regulated service will be delayed for because of the legal action.

The head of telco and ISP Callplus Annette Presley says Gattung's letter shows how arrogant Telecom is and explains why New Zealand is the only OECD country apart from Mexico not to unbundle the local loop.

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