MARKETS SPECTATOR: NZ Telecom falls from the cloud

Investors in New Zealand's biggest telco haven't warmed to a $NZ130 million restructure that will slash jobs and focus on cloud communications and entertainment.

Telecom Corporation of New Zealand has announced to shareholders its plans to shift from a “traditional fixed and mobile infrastructure company to a future-oriented, competitive provider of communication, entertainment and IT services delivered over its network and the cloud”.

Back on planet earth, Telecom says a restructuring could cost as much as $NZ130 million ($108.26 million), which is, by the way, an increase from a March estimate of $NZ80 million.

The company’s 2013 earnings before interest, tax, depreciation and amortisation will probably now be $NZ1.04 billion rather than $NZ1.06 billion, as it earlier forecast. But the EBITDA guidance excludes the restructuring cost.

Telecom, with a near monopoly on telecommunications services in New Zealand, could see its EBITDA fall below $NZ1 billion in 2013 compared with $NZ1.08 billion in 2012.

In an effort to offset this serious slip in cash flow, the company is trying to appear both lean and mean. It will fire as many as 1230 employees, or as much as 16 per cent of its full time workforce, to reduce payroll costs by up to $NZ120 million a year.

In more management gobbledygook, Telecom says it will reduce costs by a further $NZ200 million per annum by “centrally driven, business wide simplification”. That seems at odds with the company becoming a member of the ‘cloud’ and its plans to increase capex to $NZ500 million a year. This year, Telecom says its capex will be $NZ460 million.

Investors in New Zealand so far are not convinced by Telecom’s new direction.

At 1057 NZST Telecom's shares were down 7 cents, or 2.7 per cent, to $NZ2.55 on the New Zealand stock exchange, bringing its gain over the last 12 months to 10 per cent compared with the 32 per cent rise in the NZX 50 Index.

The stock was down 4 cents, or 1.8 per cent, to $2.17 on the S&P/ASX 200 Index yesterday.

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