TelstraClear sale latest: Vodafone bigwigs fly in

UPDATE July 9: Senior managers from Vodafone's head office in the UK are due to arrive in New Zealand either tomorrow or Wednesday, a well-placed source inside Vodafone has told NBR ONLINE.

Although on June 5 it acknowledged it was in talks to buy TelstraClear, Vodafone today played down the significance of the visit.

"This is a very standard, scheduled visit. Twice a year Russell and the NZ executive team run through a review of the local operations with Nick Read, CEO of Vodafone Asia-Pacific & Middle East Region, and that’s what this visit is all about,"  a Vodafone spokeswoman told NBR this morning. 

"It has been in the diary for months. To infer this visit is about anything other than a standard operational review would be wrong."

In a possible sign of lose-ends being tied up. TelstraClear and Chorus this morning announced they had reached a settlement over TelstraClear's multi-million claim for partial repayments or reduction in payments for Telecommunications Service Obligation payments made to Telecom between 2003 and 2010.

Under the demerger arrangements, Chorus assumed responsibility for any issues arising from the TSO litigation.

The two companies said in a joint statement that the terms of the settlement were confidential and that there are no outstanding issues.

TelstraClear gears up for "big announcement to staff"

UPDATE July 7:  NBR has learned that TelstraClear, which has its corporate headquarters in Takapuna on Auckland's North Shore, has booked a larger conference room at the nearby Spencer on Byron for "a big staff announcement."

The announcement will be made on either Tuesday or Wednesday.

TelstraClear has booked both days as a contingency, NBR understands.

On June 10, Telstra told the ASX and NZX that it was in talks with Vodafone about the possible sale of TelstraClear.

A spokesman for TelstraClear said the report was incorrect. He did not elabourate further.

June 5: Telstra is in talks to sell its fully-owned NZ subsidiary TelstraClear to Vodafone.

Latest: Telstra eyeing Telecom?

A Vodafone-TelstraClear merger would propel the pair into the $2 billion-plus revenue league.

For now, that territory is exclusively occupied by Telecom, which spun-off its Chorus network division in November as a condition of its Crown fibre deal (see "By the numbers" below).

A combined Vodafone-TelstraClear would also have more muscle in Ultrafast Broadband (UFB) negotiations with Chorus, and in content negotiations with Sky TV - a crucial area as the worlds of broadband and traditional broadcasting converge.

TelstraClear boss Allan Freeth recently told NBR ONLINE his company's T-Box partnership with Sky TV had reached a commercial "pain point" over a provision that restricts TelstraClear from seeking paid content from other providers.

The first approach was made by Vodafone, according to a TelstraClear statement to the ASX and NZX.

UBS is advising TelstraClear on the deal.

The statement adds: "Discussions are continuing and there is no certainty as to whether an agreement will be reached."

'Clearly negative' for Telecom
Deutsche Bank's Geoff 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.

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.

Re-ignite Telecom takeover talk?
Although Telecom shares took a hit this afternoon, the Vodafone-Telstra negotiations also have potential to reignite rumours around a Telecom takeover.

Last year, in the same legislation that enabled the Chorus spin-off and the Ultrafast Broadband project, the government lifted the Kiwishare prohibition on foreign ownership of Telecom. At the time, Deutsche Bank's Mr Zame said Telecom could represent an attractive take over target for an offshore buyer.

De-mergers were more likely to create value than mergers, Mr Zame noted.

Telecom spokesman Ian Bonnar said his company was "watching developments with interest" but would not comment further.

A TelstraClear spokesman said the company had no comment beyond what was stated in its ASX/NZX notice.

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.