Telstra sells TelstraClear to Vodafone for $840 million

Telstra has sold its fully-owned NZ subsidiary TelstraClear to Vodafone for $840 million, the company said this morning in a statement to the ASX and NZX (scroll down for full statement).

Latest: TelstraClear sale includes non-compete clause, scotching Telecom talk

Vodafone NZ CEO Russell Stanners will lead the combined Vodafone-TelstraClear.

The sale is contingent on New Zealand regulatory approval, including the New Zealand Commerce Commission, Overseas Investment Office and Ministry of Business, Innovation and Employment, which is expected to take a number of months.

On Saturday, NBR broke the news that Vodafone Asia Pacific, Africa and Middle East CEO Nick Read and other brass were arriving in the country - but Vodafone claimed it was a routine visit.

Analysts see the sale as a good fit. TestraClear is weak in mobile, but strong in the corporate market where Vodafone has a lower profile. Together, the pair will have more than $2 billion revenue and provide Telecom with its first real large scale competition in phone lines and landline broadband.

At a media conference this morning Vodafone boss Mr Stanners said the combined companies would hold 26% of the fixed line market. 

The combined company will also have more muscle as a Crown fibre retailer, and in negotiations with Sky TV (both have partnership agreements with the pay TV broadcaster; TelstraClear ecently said its relationship with Sky had reached a commercial "pain point").

Scroll down for Telecom, TelstraClear & Vodafone financials and market share stats.

Some industry analysts see Telstra clearing the decks for a run at Telecom (no longer subject to the Kiwishare prohibition on foreign ownership). It's a nice jigsaw fit, but all equity analysts approached by NBR thought the move unlikely.

"Telstra's focus outside Australia is on Asia. Buying an incumbent in a much smaller market really wouldn't make sense for them," Forsyth Barr's Guy Hallwright told NBR.

Telecom investors obviously aren't buying the theory, either. The company's shares [NZX:TEL] have been trading flat.

Deutsche Bank's Geoff Zame - who also talked to NBR when the sale talks were first announced June 5 - said Telecom could be attractive to the right party. But the buyer would more likely be a private equity player than another phone company.

Stir up market
"This deal has the potential to really stir up the NZ market, hopefully for the better," Tuanz CEO Paul Brislen told NBR.

"With a combined asset base of mobile network capability, fibre backhaul and the agreement with Telstra to continue to service trans-Tasman clients, Vodafone is now clearly in the driving seat in the New Zealand market and will challenge Telecom for dominance."

He added, "What is important is that the customer focus not be lost in the move. We don't want to see a cosy duopoly. The Commerce Commission will need to take that into consideration in its review of the deal."

'Clearly negative' for Telecom
Earlier, Deutsche Bank's Mr Zame told NBR the proposed deal was "clearly negative for Telecom if they face a more effective and integrated competitor at top end of town."

He added, "TelstraClear has good infrastructure, fibre in all metro areas, good national backhaul links, HFC [residential hybrid fibre coaxial cable] in Wellington and Christchurch and has unbundled 100-plus exchanges."

"The combination makes sense for Vodafone," Mr Zame said. It could see Vodafone grow in the corporate market "where TelstraClear has a reasonable presence and infrastructure locally [but] has been a fairly ineffective competitor for many years.Telstra never appeared willing to put much capital into it for growth so Vodafone would be a better owner."

Vodafone has strong cashflows and may use them to boost the business, Mr Zame said.

Eye on TelstraClear's corporate customers, 4G-friendly infrastructure
IDC senior research manager Peter Wise also saw Vodafone making inroads with larger customers.

"TelstraClear is traditionally strong in the corporate segment - or example it supplies telecommunications to BNZ and NZ Defence Force - while Vodafone has often struggled in this segment, other than for mobile," Mr Wise told NBR ONLINE.

"TelstraClear has a comprehensive national fibre backbone network that Vodafone could utilise to backhaul its cell tower traffic - iincreasingly important as traffic volumes grow and high speed 4G services are deployed," Mr Wise said.

Grab for $100m worth of 4G-friendly spectrum?
Telstra made a statement to the NZX confirming the talks after market rumours this morning, including tweets from Voyager Internet CEO Seeby Woodhouse.

TelstraClear has only around 50,000 mobile customers (to Vodafone's market-leading 2.5 million) - and all of them on a rebadged version of Vodafone's 3G mobile service under a wholesale deal. But it is thought Vodafone has its eye on TelstraClear's spectrum.

"TelstraClear is sitting on spectrum worth at least $100 million, including large allocations at both 1800HMz and 2100MHz," Telco2 consultant Jonathan Brewer told NBR ONLINE.

He noted that the 1800MHz band is being used by Telstra in Australia for its new 4G network.

Later this year, the government will auction 700MHz spectrum freed up by the analogue-to-digital switchover.

Telecom, Vodafone and 2degrees are among those lining up to bid for the spectrum, which can also be used for 4G cellular networks that support much faster mobile data that today's 3G networks.

By the numbers: landline ISP business

TelstraClear is the second largest ISP by the Commerce Commission's count. The watchdog put residential market share as follows for 2011 (TelstraClear is understood to have around 200,000 ISP customers and 270,000 all up):

Telecom: 49%
TelstraClear: 16%
Vodafone: 13%
CallPlus/Slingshot: 9%
Orcon: 5%
Others: 8%

By the numbers: revenue

Vodafone NZ: In its most recently reported year (the 12 months to March 31, 2011), net profit jumped 20% to $151.5 million, a 20% increase over the $121.6 million reported in 2010. Revenue rose 6% to $1.69 billion. It was a good result for Vodafone NZ's leather-jacket-and-jeans CEO Russell Stanners.

Vodafone NZ employs around 1300 staff.

TelstraClear: In Telstra's consolidated half-year result to December 31, TelstraClear is reported making a $A9 million ebit loss - an improvement on its year-ago $A17 million ebit loss. In its standalone business unit result, reported in New Zealand dollars with intercompany costs stripped out, TelstraClear reported ebit of $1 million for the half-year, against an $8 million ebit loss for the year-ago period. Revenue fell 4% to $353 million. It was another year for TelstraClear CEO and self-styled intellectual Allan Freeth.

TelstraClear also employs around 1300 staff.

Telstra: TelstraClear's numbers are chickenfeed next to those of its Australian parent, run by the New Zealand-raised David Thodey.

For the same half-year period, Telstra reported its net profit had increased by 23% to $A1.47 billion on revenue up 1% to $A12.4 billion.

Telecom: Telecom's December 31 half-year result saw the company make an adjusted net profit of $240 million (up 51%) on revenue that fell  8.5% to $2.32 billion (excluding its Chorus division spun off in November).

Telstra bought the Clear from British Telecom in 200 to form the company now known as TelstraClear. Including debt taken on by BT, the deal was worth around $435 million.

By the numbers: total NZ mobile connections

Vodafone: 2,411,000*
Telecom:  1,987,000**
2degrees: 950,000***
TelstraClear/MVNOs: 50,000

All carriers count each connection as a "customer", so a person with separate SIM card accounts for, say, a mobile phone, data stick and iPad, counts as three customers. MVNOs or mobile virtual network operators resell service. TelstraClear; easily the largest MVNO, offers a rebadged version of Vodafone's service.

* Vodafone PLC quarterly financial report, May 23 2012
** Telecom half-year financial report, February 24, 2012
*** 2degrees public statement June 2012

No stranger to Australasian growth by acquisition

Vodafone is now stranger to growth by acquisition or merger in the region.

In 2009, it merged its Australian operation with that of Hong Kong-owned Hutchison (operator of the 3 network) to form Vodafone Hutchison Australia, trading as Vodafone Australia.

Hutchison was 10% owned by Telecom NZ - the legacy of a dead-end mobile technology alliance early last decade. Post-merger, Telecom lost its board seat, but it maintains, to this day, a 5% stake in Vodafone Australia.

RAW DATA: Telstra statement to NZX/ASX

Telstra will sell TelstraClear, its wholly owned New Zealand subsidiary, to Vodafone New Zealand for NZ$840 million (A$660 million). Telstra will also return approximately NZ$490 million (A$380 million) in cash to Australia via a pre-completion dividend, which is already consolidated in Telstra’s Group results.

Vodafone New Zealand will acquire TelstraClear’s voice and data based services, network infrastructure and New Zealand customer-base.

Telstra’s Chief Executive Officer, David Thodey, said the transaction has a strong strategic rationale and is good for Telstra’s shareholders.

“The deal is a natural one, bringing together TelstraClear’s fixedtelecommunications and data products and corporate client-base with Vodafone New Zealand’s mobile offering and retail customer-base,” Mr Thodey said.

“The transaction is consistent with Telstra’s overall strategy and capital management framework that we outlined in April,” he said.

As part of the transaction, Telstra has entered into an agreement with Vodafone New Zealand to ensure service continuity in New Zealand for its trans-Tasman customers.

The sale is contingent on New Zealand regulatory approval, including the New Zealand Commerce Commission, Overseas Investment Office and Ministry of Business, Innovation and Employment, which is expected to take a number of months.

The sale proceeds, when received, will be incremental to Telstra’s previously stated expected three-year excess free cashflow of $2-3 billion (subject to the NBN roll out schedule and market conditions).

Subject to completion adjustments, Telstra will also record an accounting impairment of approximately A$130 million in FY2012, and an additional impairment of approximately A$130 million in FY2013 which is largely due to unrealised foreign currency losses.

Note: Figures are based on an A$ NZ$ conversion of $1.28.