Telstra buying Telecom? Aussie media guffaws

UPDATE June 8:  Like a wombat a dusk, media across the Tasman is slowly stirring to rumours that Telstra might try to buy Telecom.

But The Australian Financial Review is apparently unimpressed by the angle taken by its sister Fairfax paper The Dominion Post.

"One of the more dubious theories that has been postulated by the local media is that a sale of TelstraClear could pave the way for Telstra to make a move for Telecom New Zealand," sniffs the AFR.

The paper rates the scenario "Unlikely" (as does NBR, and in fact most local analysts; see below).

A takeover would wipe out Telstra's free cash flow for the next three years, it notes.

The AFR also picks up on a couple of points from Deutsche Bank's Geoff Zame (again, see below): Namely that Telecom could be an attractive takeover target with "a wide open share register and a lot of fat to be trimmed out of its cost base." But it agrees with NBR and Mr Zame that such a target is more likely to attract a private equity play.

Telstra eyeing Telecom? Key analysts weigh in

June 6: Yesterday, Telstra said it was in talks to sell TelstraClear to Vodafone.

A conspiracy theory quickly emerged from MED doyen-turned-consultant Reg Hammond: that the Aussie telco giant is merely clearing its decks before making a run at a much bigger target - Telecom. 

NBR speculated Telstra's move could reignite general Telecom takeover talk (ast year, with the Chorus split, the government lifted the Kiwishare prohibition on majority foreign ownership).

Investors failed to buy into the sale talk. Telecom's shares [NZX:TEL] fell nearly 4% to $2.44 yesterday and were flat in early trading today [UPDATE: after regaining ground on Wednesday and Thursday, they slipped back to $2.44 on Friday, despite Telecom re-affirming its earnings guidance.] 

No sense
What do equity analysts think?

Will Telstra buy Telecom? 

"No I think that is very unlikely," Forsyth Barr research director Guy Hallwright told NBR.

"Telstra's focus outside Australia is on Asia. Buying an incumbent in a much smaller market really wouldn't make sense for them."

Peter Wise, a senior research manager at market analyst IDC (and, in former work lives, head of strategy at Telecom Wholesale and general manager of business marketing at TelstraClear) was also dubious.

"I guess it's possible [but it] seems to be drawing quite a long bow," he said.

Some sense
Sydney-based market analyst Paul Budde noted Telstra has no shortage of cash. It recently turned a half-year profit of $A1.47 billion, and scored a bonus $A11 billion in its National Broadband Network assets deal with the Australian government, confirmed in March - providing it with windfall free cash flow of at least $A1 billion a year over the next three years (Telecom's market cap is around $4.37 billion - although a serious takevover bid would inevitably lead to a spike.)

However, Mr Budde - who has consulted to Telstra at a high level - told NBR ONLINE the carrier had clearly assessed TelstraClear's position in the New Zealand market, and decided to jettison that business. 

On the question of whether Telstra could turnaround and buy Telecom, Mr Budde was more ambivalent.

"It's a fascinating rumour," he told NBR ONLINE this morning. "It would make sense in that if Telstra is interested in New Zealand, it has to become significantly larger.

"There could also be efficiency benefits similar to what Vodafone has achieved across the Tasman."

Mr Budde said he saw a 50:50 chance of Telstra taking over Telecom.

Private equity play more likely
Earlier, as the Kiwishare prohibition was lifted, Deutsche Bank analyst Geoff Zame told NBR that Telecom could be considered an attractive takeover target.

“I do think M&A could be a feature of the new Telecom,” Mr Zame said. “If not a bid, then the purchase or sale of assets.”

However, the most likely suspect was not another telco, like Telstra, but a private equity player in a cost and cash stripping exercise, Mr Zame said.