Telstra is in talks to sell its fully-owned NZ subsidiary TelstraClear to Vodafone.
Telecom shares [NZX:TEL] were down 4.33% to $2.43 in late trading.
A Vodafone-TelstraClear merger would propel the pair into the $2 billion-plus revenue league.
For now, that territory is exclusively occupied by Telecom, which spun-off its Chorus network division in November as a condition of its Crown fibre deal (see "By the numbers" below).
A combined Vodafone-TelstraClear would also have more muscle in Ultrafast Broadband (UFB) negotiations with Chorus, and in content negotiations with Sky TV - a crucial area as the worlds of broadband and traditional broadcasting converge.
TelstraClear boss Allan Freeth recently told NBR ONLINE his company's T-Box partnership with Sky TV had reached a commercial "pain point" over a provision that restricts Sky TV from seeking paid content from other providers.
The first approach was made by Vodafone, according to a TelstraClear statement to the ASX and NZX.
The statement adds: "Discussions are continuing and there is no certainty as to whether an agreement will be reached."
'Clearly negative' for Telecom
Deutsche Bank's Geoff Zame told NBR the proposed deal was "clearly negative for Telecom if they face a more effective and integrated competitor at top end of town."
He added, "TelstraClear has good infrastructure, fibre in all metro areas, good national backhaul links, HFC [residential hybrid fibre coaxial cable] in Wellington and Christchurch and has unbundled 100-plus exchanges."
"The combination makes sense for Vodafone," Mr Zame said. It could see Vodafone grow in the corporate market "where TelstraClear has a reasonable presence and infrastructure locally [but] has been a fairly ineffective competitor for many years.Telstra never appeared willing to put much capital into it for growth so Vodafone would be a better owner."
Vodafone has strong cashflows and may use them to boost the business, Mr Zame said.
Eye on TelstraClear's corporate customers, 4G-friendly infrastructure
IDC senior research manager Peter Wise also saw Vodafone making inroads with larger customers.
"TelstraClear is traditionally strong in the corporate segment - or example it supplies telecommunications to BNZ and NZ Defence Force - while Vodafone has often struggled in this segment, other than for mobile," Mr Wise told NBR ONLINE.
"TelstraClear has a comprehensive national fibre backbone network that Vodafone could utilise to backhaul its cell tower traffic - iincreasingly important as traffic volumes grow and high speed 4G services are deployed," Mr Wise said.
Grab for $100m worth of 4G-friendly spectrum?
Telstra made a statement to the NZX confirming the talks after market rumours this morning, including tweets from Voyager Internet CEO Seeby Woodhouse.
TelstraClear has only around 50,000 mobile customers - and all of them on a rebadged version of Vodafone's 3G mobile service under a wholesale deal. But it is thought Vodafone has its eye on TelstraClear's spectrum.
"TelstraClear is sitting on spectrum worth at least $100 million, including large allocations at both 1800HMz and 2100MHz," Telco2 consultant Jonathan Brewer told NBR ONLINE.
He noted that the 1800MHz band is being used by Telstra in Australia for its new 4G network.
Later this year, the government will auction 700MHz spectrum freed up by the analogue-to-digital switchover.
Telecom, Vodafone and 2degrees are among those lining up to bid for the spectrum, which can also be used for 4G cellular networks that support much faster mobile data that today's 3G networks.
No stranger to Australasian growth by acquisition
Vodafone is now stranger to growth by acquisition or merger in the region.
In 2009, it merged its Australian operation with that of Hong Kong-owned Hutchison (operator of the 3 network) to form Vodafone Hutchison Australia, trading as Vodafone Australia.
Hutchison was 10% owned by Telecom NZ - the legacy of a dead-end mobile technology alliance early last decade. Post-merger, Telecom lost its board seat, but it maintains, to this day, a 5% stake in Vodafone Australia.
Re-ignite Telecom takeover talk?
Although Telecom shares took a hit this afternoon, the Vodafone-Telstra negotiations also have potential to reignite rumours around a Telecom takeover.
Last year, in the same legislation that enabled the Chorus spin-off and the Ultrafast Broadband project, the government lifted the Kiwishare prohibition on foreign ownership of Telecom. At the time, Deutsche Bank's Mr Zame said Telecom could represent an attractive take over target for an offshore buyer.
De-mergers were more likely to create value than mergers, Mr Zame noted.
Telecom spokesman Ian Bonnar said his company was "watching developments with interest" but would not comment further.
A TelstraClear spokesman said the company had no comment beyond what was stated in its ASX/NZX notice.
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 customers):
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 lifted 6% to $1.69 billion. It was a good result for Vodafone NZ's leather-jacket-and-jeans CEO Russell Stanners.
TelstraClear: In 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.
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.
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