Even split likely for divided Telecom

17:00, Jun 19 2011

Telecom is likely to split evenly into two parts, with shares in its retail arm and Chorus worth similar amounts, financial analysts believe.

Telecom shareholders will be given a share in Chorus and another in the yet-to-be-named retail business for each Telecom share they own, if they approve the company split, which is a condition of Telecom's government contract to build the bulk of the ultrafast broadband network.

One report implies that taxpayers will end up owning about 18 per cent of Chorus after the separation.

The Government has agreed to put $929 million into Chorus if Telecom's sharemarket split is approved by investors, half as a loan and the other half as equity.

The equity investment will fully convert into dividend-yielding securities by 2036, if the stake is not bought out before then.

Communications Minister Steven Joyce said it would not be possible to work out what share of Chorus the Crown would own, which is the same as the proportion of dividends the Crown would be entitled to from 2036, until details of the company's split were finalised.


However, analyst Morningstar said a "rough valuation" implied Chorus would have an enterprise value of $2.6 billion, suggesting the Crown's investment would buy just over one-sixth of the company.

Telecom's shares have been volatile since the UFB announcement. They gave up all the gains they made since its involvement in the UFB scheme was announced last month, touching a post-UFB low of $2.27 on Tuesday, before rallying strongly to close at $2.38 on Friday.

Morningstar has upgraded its valuation to $2.70 and its advice from "hold" to "accumulate", forecasting Telecom's size, diversity and "incumbency" placed the company in a position to "survive well".

Craigs Investment Partners analyst Geoff Zame doubted shareholder support for separation would be put at risk even if the company's shares resumed their downwards drift.

"I think it is safe to assume that if the split has the unanimous support of the board, it will get shareholder support – no problem," he said.

Mr Zame said Morningstar's valuation of Chorus appeared in the right ball park. Chorus and Telecom's retail arm would have similar earnings before interest tax, depreciation and amortisation, but they might trade at different multiples.