Telecom N.Z. Considering Range of Separation Options

Telecom Corp. of New Zealand, the country’s biggest phone company, said it could split into two companies if that is needed to participate in the government’s high-speed broadband project.

Separation of the company’s network and parts of its sales unit that deals with rivals may be required to join the project, Chief Executive Officer Paul Reynolds told investors in Sydney today. Options include a partial or total sale of the unit or a demerger and distribution of stock to shareholders, he said.

The government has ruled that companies that want to join its proposed NZ$1.5 billion ($1 billion) investment in a fiber-optic network shouldn’t also offer retail services. Telecom, which is in talks with the government about whether to participate or to use its existing copper wire and fiber network in competition with new operators, wants changes to regulation as part of a deal.

“The potential for changes in regulation is recognized in government circles,” Reynolds said. “By putting separation on the table we can begin a dialog. We have an opportunity to ensure we can reset the regulatory regime.”

The company hasn’t made any final decisions on whether to participate in the project or not, and any proposal will likely incur costs the company hasn’t completely calculated, Reynolds said. His comments were broadcast on the Telecom (TEL) website.

Separate and Duplicate

Separation would mean duplication of overheads and a loss of flexibility, he said, without providing details. The benefits may include removal of regulations on retail units, he said.

Staying outside the broadband project may mean the regulatory burden will persist as the “single-biggest overhang for shareholder value,” Reynolds said.

Telecom rose 0.5 percent to NZ$1.91 at the 5 p.m. market close in Wellington. The shares have lost more than 23 percent this year, compared with a 6.1 percent decline in the NZX 50 index.

The company expects costs will fall by about NZ$174 million in the five years to June 30, 2013, Chief Financial Officer Russ Houlden said at the same investor meeting.

Cost reductions of about NZ$622 million are planned, NZ$98 million more than proposed a year ago as expectations for revenue growth slow, he said. The cuts will be offset by expenses growth of about NZ$448 million during the period, as parts of the company grow, he said.

Telecommunications globally are “mining their cost bases” as revenue growth slows, said Reynolds.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

To contact the editor responsible for this story: Iain Wilson iwilson2@bloomberg.net.

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