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2degrees set up for bigger market

TOM PULLAR-STRECKER
Last updated 05:00 01/07/2013

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Telco 2degrees has taken a big stride towards financial sustainability by almost halving its annual loss to $47.2 million.

Consumers can celebrate - research for 2degrees by Vend Consulting last month claimed the extra competition it had brought to the mobile market had economic benefits to the tune of $3.9 billion. But the company's investors may have to keep the champagne on ice.

With the company's accumulated losses now standing at $292m, it remains to be seen whether it will recoup its investment, even if 2degrees does achieve break-even.

IDC Research analyst Glen Saunders said it was "sitting on the fence" but, either way, it would take a few years for shareholders to achieve a positive return.

2degrees' total comprehensive loss was down from $92.6m in 2011. Annual revenues rose 37 per cent to $254.1m and it enjoyed an $7.6m inflow of cash from operating activities, versus a $45.3m outflow in 2011.

Acting chief executive Stewart Sherriff announced last week that 2degrees had secured a $165m overdraft from the Bank of New Zealand, which he forecast would be sufficient to "fully fund" the company's business plan and see it through to profitability.

Sherriff, who is also a vice-president of 2degrees' American majority owner Trilogy International, stepped into the breach at 2degrees following the death of chief executive Eric Hertz in a plane crash in March. The company needed to "get up the value chain" by increasing its 12 per cent share of the $2.4b mobile market, which would not be a simple task, Sherriff said.

"The competitive landscape in which we operate is somewhat unpredictable at times. You have got to be fairly innovative to combat that."

But he believed there was no reason the company could not get to at least a one-third share of the mobile market.

Sherriff said the BNZ facility meant his permanent successor would have money to spend. But his successor would need to be "clinical" in execution.

"The bad news is you have got [banking] covenants you have got to follow and you have got to execute to the business plan, otherwise they stop paying you the money."

In the wake of Vodafone's 2011 takeover of TelstraClear, both 2degrees' rivals in the mobile market, Telecom and Vodafone, have the ability to bundle mobile and fixed-line telecommunications products to millions of customers.

In August last year, Hertz had signalled that 2degrees was looking to follow suit by entering the fixed-line market.

But Sherriff said 2degrees had yet to decide how to do that.

"There are only three options: you either build, buy or partner, and we are looking at the most viable way to enter into that market.

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"We are having those discussions right now, but we won't rush in and make the wrong decision."

- BusinessDay.co.nz

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