Structural Separation could increase Telecom’s worth?

Citigroup have said the Telecom board should actively consider a structural split of the company. I agree this has the potential to increase value for Telecom.

Telecom is required by legislation to do a three way operational split into network, wholesale and retail. The idea is that all parties can access the network in an equivalent way, and also that wholesale customers are also treated equally.

Now if Telecom wished to, it could actually split into two companies. One would be the network access company, and the other would be the wholesale and retail services company. Now why would it split? Well because having lost the ability to make use of vertical integration to create monopoly profits at all levels, the different divisions require different strategies, different management and I suggest different investors.

The network access company, if it was split from the rest of Telecom, could have a huge future. It would be well placed to be the future fibre network for most of New Zealand. It would have dozens of companies wanting to use their network, and willing to pay for it. As an infrastructure company they would be more likely to attract specialist infrastructure investors and their investment profile is likely to be lower profits yet lower risk as it has guaranteed income. If the network access company remains a division of Telecom, people will be wary about them having too large a share of the fibre network in NZ. If they are truly independent and their only focus is on providing access to all comers, then they would be far better placed to grow.

The wholesale/retail remainder of Telecom, freed from ownership of the monopoly network, would be free to compete far more aggressively than it is able to at the moment. It could even rebrand to improve its tarnished image. It’s board would require far more of a marketing outlook and it would attract investors looking for potentially higher returns, but with increased risk.

The Board could do this by splitting into the two companies and giving existing shareholders equal shares in both. Over time, as people sell one sort of share but not the other, they would end up with quite diverse shareholdings.

Now the Telecom Board shouldn’t structurally separate on a theory. But they have a fiduciary duty to shareholders to increase value. Hence one of their first instructions to the new CEO should be to fully investigate whether a structural split would increase shareholder value over the medium to long term.