Telecom may get $100m XT compo

BY TOM PULLAR-STRECKER

Alcatel-Lucent is rumoured to have agreed to credit Telecom $100 million to compensate it for the shortcomings of the XT mobile network, which it built and operates for Telecom.

Telecom's shares edged down 2 cents to $2.13 in a falling market, after it reported a 39 per cent drop in third quarter profits to $97 million. Craigs Investment Partners analyst Geoff Zame believed Telecom's dividends were likely to fall from 24 cents to 16 cents next year.

Sources said a compensation deal was discussed when Alcatel-Lucent chief executive Ben Verwaayen visited Telecom executives in Auckland this week.

Telecom chief executive Paul Reynolds and Alcatel-Lucent declined to comment.

"We are working on any issues in our contract confidentially and privately as we should," Mr Reynolds said.

Two compensation packages offered to XT customers following a spate of network outages at the turn of the year are expected to cost Telecom about $15m.

British consulting firm Analysys Mason advised Telecom in a report released yesterday that XT was capable of providing a high-quality service, but it should slow down connecting customers to the network until it was "reliably stable".

But Mr Reynolds said that advice was based on a "snapshot" of the network in January and Telecom would press the button on marketing XT in a few weeks. "We have stalled our marketing for the best part of five months ... and the time is right to begin marketing."

He stopped short of claiming all XT's problems had been fixed, but said the network was stable, providing a "bloody good service" and Telecom and Alcatel-Lucent had made "very significant improvements" in their processes and procedures.

Telecommunications Users Association chief executive Ernie Newman said Analysys Mason's report and Telecom's response should give users confidence XT was a "sound and robust platform for the future".

Communications Minister Steven Joyce said Telecom's customers would be pleased to see the company was moving quickly to improve the network's reliability.

He would consider whether any further action was required to protect the integrity of the emergency calling system.

The report overshadowed a solid, if uninspiring, quarterly result.

Mr Reynolds said people should concentrate on an "underlying" 2.7 per cent rise in Telecom's earnings before interest, tax and depreciation and amortisation (ebitda), rather than its profit drop.

Telecom announced it would pay out about 90 per cent of its adjusted net profit as fully imputed dividends in the 2010-2011 financial year, when its policy of paying a fixed 6 cent quarterly dividend comes to an end.

Despite the generous payout ratio, chief financial officer Russ Houlden confirmed that would mean dividends would fall.

He said a 6c quarterly dividend guarantee could not be sustained and might have put Telecom's single A credit rating at risk.

Mr Reynolds acknowledged the business faced a high degree of uncertainty, in part due to the Government's $1.5 billion ultrafast broadband investment initiative.

Telecom has signalled it may sell all or part of network arm Chorus.

It has appointed Ernst and Young to advise it on the possible sale or merger of Telecom International's wholesale voice call business, which had $20m in ebitda last year.

Mr Reynolds said Telecom remained "open to offers" for its Australian business AAPT.

"With all investments people have to pick their choices, but we have been managing strongly on our guidance.

"I think there is enough information there for people to make an informed choice."

Third Quarter By The Numbers

- Net profit down 39pc at $97m

- Revenues down 10pc at $1.27b

- No change to financial guidance of full year ebitda of $400m-$440m

- Southern Cross dividends of $14m, compared with $40m in same quarter of 2009

- "Underlying" ebitda up 2.7pc at $450m 590,000

- XT connections at end of March, up 128,000 from the end of December

- Share of mobile market revenues unchanged at 39pc

- Share of retail broadband market remains 57pc, despite Telecom only signing 40pc of new broadband customers during the quarter

- © Fairfax NZ News