The Vodafone-TelstraClear deal in 10 bullet points

Vodafone CEO and 'Vodaclear' CEO apparent Russell Stanners

A quick guide to the biggest telco deal in a generation:

1. On July 12, Telstra agreed to sell TelstraClear to Vodafone for $840 million ($A660 million).

2. The combined Vodafone-TelstraClear will extend Vodafone's lead in mobile, and give it 26% market share in fixed lines - providing Telecom with its first competition of real scale in landlines. The merged company will have revenue of around $2.5 billion - to Telecom's $4.5 billion - and operating earnings of $700 million, nipping on the heels of Telecom's $1.1 billion. Analysts see the strenthened competition as a clear negtive for Telecom, but the company's shares were up marginally - perhaps on investor hopes that Telstra would turnaround and by Telecom.

3. Vodafone NZ CEO Russell Stanners will head the combined company. Asked if there was a place for TelstraClear CEO Allan Freeth, Mr Stanners told NBR it would be premature to comment while the deal was before regulators. The two men are chalk and cheese.

4. The deal includes a non-compete clause that will keep Telstra out of NZ of undisclosed duration. Even before the non-compete clause was revealed, equity analysts had dismissed the possibility that Telstra was clearing the decks for a run at Telecom, where profits have been declining for years. Yesterday, Deutsche Bank's Geoff Zame held fast to that view, calling the Telstra buying Telecom theory "a pipe dream."

5. Analysts see the deal as a good fit. TelstraClear was weak in mobile, but strong in corporate and IT services business were Vodafone wants to expand. 

6. Given TelstraClear barely breaks even, analysts had picked it would go for $450 - $600 million. The higher price reflects the value of TelstraClear's (un-used) 4G spectrum, and a key provision that means Vodafone will service Telstra's transtasman clients, such as BNZ (owned by NAB). Telstra seems to have a keener desire than anticipated to make a clean break from Australian media dubbed its "New Zealand misadventure."

7. The deal is good news for Sky TV, which has a significant wholesale deal with TelstraClear for its T-box set-top boxes. TelstraClear was lurching toward a war with Sky, Vodafone's Mr Stanners made it clear to NBR he was happy with his company's Sky TV partnership, and did not find its contracts restrictive.

8. Vodafone says it will phase out the TelstraClear brand over 18 months. TelstraClear sponsorships will be reviewed.

9. On Friday, Vodafone formally applied to the Commerce Commission for clearance. Its filing pushes the angle that new technology developments allow companies like IBM, HP and Datacom to offer telecommunications services. Regardless, where there were three big telcos pitching for big business and government contracts, there will now be two. That means "approval is not a certainty," Forsyth Barr analyst Guy Hallwright warns. The Telecommunications Users' Association says on balance the deal is a good things, as the combined company will have the muscle to provide Telecom with its first real across-the-board competition. NBR agrees.

10. The Commerce Commission is due to make a decision on July 27. But a spokeswoman told NBR the complexity of the deal meant it was almost certain the watchdog would negotiate an extension. All sides expect the approval process to take months. Beyond the approval process, Deutsche Bank's Mr Zame thinks it will take Vodafone and TelstraClear "at least 24 months" to integrate their business.

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.

TelstraClearIn 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.

Vodafone CEO Russell Stanners told NBR Friday that there will be some job losses, but said most would be in back-office positions. He said Vodafone - which has brought call centre and technical jobs back to NZ over the past year - was likely to axe TelstraClear's Manila-based helpdesk.

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

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9 Comments & Questions

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So, the total number of telcos are being reduced, the deal keeps Telstra out of New Zealand, and retail pricing is already outrageous.

What will consumers get out of this? Nothing.

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I think on balance it's a good thing. 26% fixed line share isn't duopoly territory. It does give a decent base to mount a good attack on Telecom's business in that area, which no-one's every one before.

I'm cautiously optimistic the merged company will unbundle more Telecom exchanges in the DSL market in the short term, and have the scale to push along the UFB retail market in the medium-to-long term.

In the fixed line area, we're not moving from three big telcos to two but from one near-monopoly with others nibbling around its edges to two major contenders.

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But how does a duopoly create competition?

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Because up until now, in fixed lines, we've had one near-monopoly, and others nibbling around its edges. Now, we have two serious contenders.

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Sadly the deal isnt about the consumer, its about profit maximisation in a shrinking market. That Telecom have failed to develop a forwards looking view of the market and its competitors, not to mention being too stupid to innovate (and as such leaving themselves with price reductions as the only means to stay relevant) should be the real issue here.

The other big issue is that Vodafone will continue to hoover vast sums of money out of the NZ economy, back to the UK mothership. Telstraclear has long been a cot case and Now it is up to Stanners to fix this. He is a capable and competant CEO so good luck to him, He'll need it.

Also keep in mind the sheer amount of fibre Voda stands to inherit which should dramatically improve on the performance of its mobile network.

The other factor no one seems to have touched on is Vodafones ability to offer a more compelling portfolio of services on a trans tasman basis. Provided Vodafone Australia can sort themselves out (and that could be a big ask), the new entity should be able to engage with Australian head offices to win business in New Zealand. This and Vodafones lessening reliance on wholesaled fibre will nop doubt have the potential to inflict some negative pressure on Telecoms already woeful share price.

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pheww, well done Telstra, Vodafone why?

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Worldwide, Vodafone's getting into more fixed line business - and the purchase of TelstraClear gives it more scale in this sector in NZ.

Vodafone also gets TelstraClear's corporate IT services clients - pitting it against Telecom's Gen-i division - and the 4G spectrum that TelstraClear has never used.

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Our market is TOO small to have 3 major telcos and a host of small players like callplus, orcon, digital island, compass, world exchange, fueltel, zintel, and so on......and on

This is a good thing.

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Could possibly be a good deal for consumers, depending on how VodaClear play the game;we wait to see!

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