Friday, October 17, 2008

Telecom NZ - the cost of 3G

US shareholder attacks Telecom’s mobile plans

Telecom continues to be haunted by its bogeyman shareholder, Elliott International, this time over its new mobile network rollout plans.

In a letter emailed to the NBR entitled “All Talk, No Detail” the group presents a series of questions for the board, questioning the viability of a $391 million extension of capital to Telecom’s mobile network upgrade.

The total capital spend of the project is $574 million.

Elliott’s main gripes are with the detail of the mobile network build offered at Wednesday’s meeting, specifically the return on investment timeframes, issues with plans to reinvest future dividends to fund the construction, and a general lack of transparency from the board.

It also argues that Telecom shouldn't issue more shares to help pay for the new network.

Telecom says it will run a dividend reinvestment plan to help fund the network and issued a profit warning due to the costs and depreciation associated with it.

But Elliott, which has previously argued that Telecom should sell its network to improve shareholder returns, says shareholders have not been drawn the full picture of what’s at stake.

“Why did the Board choose to announce these figures this week instead of at the AGM, just thirteen days earlier, when shareholders were in attendance?

“What has happened to change the company's position so radically in the past two weeks? Arguably, this restricted shareholders from seeing the full picture when casting their votes,” Elliott says.

“Does the board seriously believe that issuing more stock with the stock price at an all-time low is beneficial to shareholders?

“Does the board understand that value can be created for shareholders by optimizing the capital structure?”

Telecom chairman Wayne Boyd says the company welcomes the views of all our shareholders regarding the company’s strategy and performance.

He says many of the important issues raised by Elliott in relation to the announcement this week were discussed during management’s conference call with shareholders and analysts.

The mobile strategy, not withstanding the near-term financial implications, is in the best interest of shareholders and the long-term strategic and financial performance of the company, he adds.

“No doubt there will always be vigorous debate and discussion around our performance and our strategic direction, and that’s to be expected and welcomed. However, at the same time, we have a job to do and we intend to get on with it, for the benefit of all shareholders.”

This week Telecom predicted its earnings before tax, depreciation and amortisation will fall by 5% to 8% (down from previous guidance of 4% to 6%).

It says net profit after tax will now decline to $460-500 million, down 8% on previous guidance of $500-540 million.

“This is the fourth time in six months and second time in the last two months that Telecom has lowered its guidance range,” Elliott says.

Most analysts are projecting the announcement to hurt 2009 figures, with a bounce-back in 2010 as the network is in use and making a return.

Telecom’s share price fell 21 cents from to $2.23 at the close on the news, before recovering to just over $2.30 by lunch-time today.

Telecom’s share price sat around $6.50 in 2005.

Elliott – a 3% stakeholder in Telecom – has long been calling for operational separation of its wholesale and retail arms, claiming that as a singular entity the return to shareholders is inadequate.

At Telecom’s recent annual meeting Elliott attempted to have its two directors, Mark Tume and Mark Cross, elected to the Telecom board.

Although unsuccessful, the pair managed to gather support of 24.8% and 21.8% respectively, proving that their dissent touched a nerve, and was more than just shareholder activist behaviour.

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