Reynolds leaning towards full 'de-merger'

Telecom could be spilt into two businesses by August next year, chief executive Paul Reynolds told analysts at a briefing in Sydney yesterday.

Mr Reynolds indicated he was leaning towards a full "de-merger" that would divide Telecom into two listed companies, allowing its network arm to build a fibre-optic ultrafast broadband network in partnership with the Crown. Under that scenario, Telecom shareholders would be issued shares in Chorus.

It was difficult to know what each part of the business was worth and a de-merger might be fairer and quicker than a full float of Chorus, he said.

"We really don't know how the future is going to unfold – is the upside going to be in Chorus or is it going to be in Telecom?"

A partial sell-down of Chorus to the Government was also possible, he said.

It is understood that the Government is no longer ruling that out as an option, so long as any money it paid for a stake was retained by Chorus and used to fund the rollout of ultrafast broadband.

There has been speculation that Telecom might seek to retain a 40 per cent stake in Chorus, but Mr Reynolds appeared more focused on lifting the regulatory burden on Telecom's wholesale and retail arms than clinging to part of the network business.

"And by the way, there is just no way [structural separation] can be done without the regulatory upside," he said.

He confirmed shareholders would need to approve a breakup of the company, and Telecom might choose to compete with a Government-backed fibre network if the Government picked other partners to build the network.

Telecom expects to find out by September whether Chorus will be the Government's partner. A de-merger might take another 11 months to arrange.

Mr Reynolds said the economic environment for telecommunications companies had changed over the past year to 18 months. Competition from the likes of Skype had meant wholesale prices for carrying international phone traffic had "collapsed" to a fraction of a cent per minute.

He had also been surprised by the extent to which Vodafone had cut prices in the wake of competition from mobile entrant 2degrees.

Telecom's response would be to reduce investment in new "value-added" services and accelerate cost-cutting. The Auckland-based firm was also centralising functions.

Chief financial officer Russ Houlden said Telecom expected to be able to cut customer service jobs as a result of more efficient systems and the first to go would probably be jobs it had outsourced overseas.

About a third of its call centre staff are contractors based in the Philippines.

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