Vodafone buys Telstra's NZ outfit, Telecom NZ at risk

WELLINGTON Thu Jul 12, 2012 2:43am EDT

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WELLINGTON (Reuters) - Australia's Telstra (TLS.AX) will sell its struggling New Zealand operations to British mobile operator Vodafone in a NZ$840 million ($670 million) deal, threatening Telecom New Zealand's dominance and potentially making it a future takeover target.

Under the sale, Vodafone New Zealand said it will acquire TelstraClear's fixed-line and Internet operations, which hold only 16 percent of New Zealand's broadband market but will now have the muscle to compete head-on with much larger Telecom.

The deal also cuts Telstra free from the revenue-poor asset and opens the door to a possible takeover of Telecom TEL.NZ down the line by its Australian counterpart, as the New Zealand company faces the daunting task of expanding in an already mature market.

It will give Vodafone, which competes with Telecom in New Zealand's mobile market where both hold a 40 to 50 percent share, a stronger foothold in fixed-line services with around 30 percent of the fixed-line broadband market. Telecom currently controls just over half of that market.

Vodafone will also be better able to compete with Telecom in buying access to ultra-fast broadband, which is expected to be rolled out in New Zealand by 2019.

Telstra shares rose to a 3 1/2-year high of A$3.89 after the announcement before turning lower to end down 0.3 percent. Telecom TEL.NZ shares rose 2.2 percent on Thursday, recovering from an initial dip. New Zealand's benchmark stock index .NZ50 was up 0.6 percent.

TURNAROUND CHALLENGE

Few in the market expect Vodafone's strengthened position will immediately shake Telecom's market dominance, given TelstraClear's weak position and declining revenue, which sagged 3.8 percent in the six months to December.

Vodafone, which expects regulatory approvals for the deal to be completed late this year, will also have to rein in capital expenditures, which have risen due to the costs of rebuilding TelstraClear's network infrastructure in Christchurch, one of its major hubs which was devastated by an earthquake in 2011.

But some industry experts believe Telecom may eventually struggle to compete with Vodafone's global scale and aggressive strategies, and would not rule out the possibility that cash-rich Telstra may swoop in on Telecom in the future if the New Zealand company's fortunes wane.

"Telecom would have a very, very difficult time moving forward with a strengthened Vodafone. That may further build the case for an integration of Telecom NZ and Telstra," Australia-based independent telecoms consultant Paul Budde said.

He added that combining Telstra and Telecom was sensible from a cost perspective, given the lack of room to expand in New Zealand's small yet mature market.

"It makes sense to integrate Telstra and Telecom because in the end it's about cost savings, which would be possible if the two were merged," Budde said.

Vodafone on Thursday said the TelstraClear sale included a restraint of trade clause, which would bar Telstra from re-entering the New Zealand market, although it did not say for how long.

The NZ$840 million price tag was more than double market expectations for roughly NZ$400 million, and analysts said Vodafone appeared willing to pay a premium for the benefits of TelstraClear's network assets and customer base.

Fraser McLeish, an equities analyst at RBS in Sydney, said the sale dovetailed with Telstra's strategy to generate A$2 billion to A$3 billion ($1.95-2.93 billion) of free cash over the next three years.

"This really adds to that cash that's available to return to shareholders or potentially for some acquisitions," he said, adding that Telstra had mentioned interest in picking up assets related to network applications and services.

($1 = A$0.9765, NZ$1.259)

(Editing by Paul Tait and Edmund Klamann)

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