Telecom (NZX: TEL) has confirmed, for the first time, that it will hold its 10% stake in Hutchison Telecommunications as it merges with Vodafone’s Australian operation.

Under the 50/50 joint venture deal, which is due to close in June, Telecom’s 10% stake in Hutchison would convert to a 5% stake in the combined company.

The merged operation will retain the rights to Hutchison’s “3” brand for transitional purposes, and be legally registered as Vodafone Hutchison Australia (VHA), but will trade as Vodafone.

Still at issue: whether Telecom will hold a seat on the VHA board.

Telecom bought into Hutchison Telecommunications (ASX: HTA) - the ASX-listed, Australian subsidiary of Hong Kong-based Hutchison Whampoa - in 2001 for $A400 million, looking to tap Hutch’s expertise and buying power in 3G networking.

In the final event, Telecom decided to build its 3G network without input from Hutchison.

Nevetheless, it held its 10% stake, which earned it a seat on the eight-person Hutchison board - currently occupied by Telecom group strategy director Rod Snodgrass (right).

AMN Amro analyst Geoff Zame says a 5% stake would not ordinarily be enough to automatically warrant a board seat, but that it’s possible Telecom has a prior arrangement with Hutchison that could see Mr Snodgrass sit on the VHA board.

A spokesman for Telecom NZ said the company does not yet no the composition of the VHA board.

If Mr Snodgrass does make it to the VHA board, the Telecom group strategy director will find himself in a peculiar situation.

Mr Zame, and Australian-based industry analyst Paul Budde, both think it likely that VHA - which will have 27% market share and be Australia’s third largest telco after Telstra and Optus, with annual revenue of $A4 billion - will want to move beyond being mobile only to become a full-service telco.

That would mean a move into the landline market, which would throw VHA into direct competition with Telecom’s Australian division, AAPT.

Mr Zame says that is not necessarily an issue. Mr Snodgrass could recuse himself from board discussion about AAPT, or issues relating to both Vodafone Australia and Vodafone New Zealand.

While not privy to the UK-based Vodafone’s local management structure, Mr Zame says that from their independent strategy, it seems that Vodafone Australia and Vodafone New Zealand are “left to their own devices”.

In formal terms, Vodafone New Zealand chief executive Russell Stanners reports to Vodafone regional chief executive Nick Reed, who managers a diverse bag of countries including Australia, New Zealand, India and Qatar.

“Windfall"for Telecom
Mr Budde says while it’s hard to make any case in terms of business strategy for Telecom to hold its VHA stake, it will give the telco a good corporate overview as well as the chance to "create some mischief".

Mr Zame describes the merger as a “windfall” for Telecom, which before the deal was announced had little chance of recouping, let alone building on, its investment, which is carried at cost (that is, the $A400 originally paid) on its balance sheet. "It's really thrown them a lifeline."

Its 10% stake in Hutchison - currently worth around $A150 million - is likely to appreciate as a 5% stake in VHA.

At Telecom’s half-year result presentation, Telecom chief executive Paul Reynolds declined to say if his company would maintain it stake, but certainly struck a bullish tone, calling it “a value-enhancing deal”.

Certainly, Dr Reynolds' view of the holdng was a happy coincidence. Mr Zame describes the telco's Hutchison stake as "illiquid", with its size making it difficult to shift on the open market withouth depressing its value further.

Now Telecom has confirmed it will hold its stake, and NBR understands it used its 10% holding to vote in favour of the merger at Hutchison’s special meeting on April 6, at which a secret ballot overwhelmingly backed the deal.

As well as shareholder support, the Vodafone-Hutchison Australia merger has also gained approval from Australia’s Foreign Investment Review Board. The ACCC (the Australian equivalent to the Commerce Commission) has flagged its concern that the merger could reduce competition, and asked for industry and public submissions. It will release a final decision on May 6.