Telecom demerger by end of November, Reynolds flags exit

Report from BusinessDesk
Telecom Corp. expects to split its business into separate retail and network entities by the end of November, and will replace chief executive Paul Reynolds in the 2012/13 financial year.

The Auckland-based company has released more information about its proposed demerger after Communications Minister Steven Joyce yesterday signed off on its split plan. The network unit, Chorus, will be saddled with most of the combined company’s net debt at about $1.7 billion, while so-called New Telecom will have between $750 million and $950 million of debt.

Reynolds will stay on through the demerger process, though the board will look for a replacement next year with an aim to pick someone for the following financial year. His exit will mark a turnover of top roles for the new entity, with Telecom chairman Wayne Boyd scheduled to step down once the demerger is complete.

With the demerger process coming to an end during 2012, “it will bring to a natural conclusion the transformation programme the board hired me to lead, and after five years in the role, it will be a good time to hand over to a new CEO,” Reynolds said in a statement.

Telecom will issue a scheme booklet to shareholders containing more information about the demerger in mid September, which they have to approve for it to proceed.

The phone company put forward the prospect of structural separation in a bid to shed the heavy regulatory burden of operating a copper-line network monopoly, and win tax-payer funding to build a nationwide fibre network.

That bid was successful, and Chorus won $929 million of the $1.35 billion on offer from the government to roll-out an ultra-fast broadband network. Chorus expects it will have to spend $470 million and $670 million of its own money over the next eight years on construction.

Once the split is complete, New Telecom will be the bigger of the two companies, with adjusted pro-forma earnings before interest, tax, depreciation and amortisation of $1.125 billion on $5.1 billion of sales in the 12 months ended June 30, while Chorus made $676 million on $1.1 billion of revenue.

New Telecom expects to stay listed in the NZX 50 Index, S&P/ASX 200 Index and the MSCI World (Standard) Index. Chorus will list in New Zealand and Australia. It expects to qualify for the NZX 50, but not the ASX 200.

The retail unit will be looking to keep its credit rating in the ‘A’ band after Standard & Poor’s flagged it will likely cut the rating by at least one notch with the demerger weakening the phone company’s “strong business profile.”

Chorus, meantime, expects to achieve a preliminary credit rating of ‘BBB’ and needs to maintain an investment grade rating or the government has the right to terminate their agreement.

Telecom’s shares fell 1.3% to $2.73 in trading yesterday, and have climbed 27% this year.


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