Telecom bows to Government pressure

Impending broadband rollout pushes Telecom towards structural separation

Telecom has caved in to Government pressure and will consider splitting into two separate companies.

This would make it more likely that the Government's $1.5 billion plan to roll out ultrafast broadband to three-quarters of homes will get off the ground.

The concession came yesterday as New Zealand's second biggest company revealed it was axing 200 management jobs this financial year, with more cuts likely. Telecom's share price also dived as it slashed its profit forecasts by hundreds of millions of dollars over the next three years.

After playing chicken with the Government over the ultrafast broadband contract, chief executive Paul Reynolds blinked first and said the company was open to working with the Government on a "full range of approaches".

Telecom is precluded from becoming a full partner in the scheme unless it separates its retail and network businesses.

A split could see Telecom's 23,000 kilometres of fibre-optic cable become the nucleus of the new home and business fibre network, which the Government hopes will revitalise the country's economic fortunes and help catch up with living standards in Australia.

Reynolds said his board was "open-minded" and would run "all of this through the filter of the benefit to New Zealanders".

Telecom risks being frozen out of the broadband scheme and seeing contracts to build the fibre network handed to electricity lines companies, if it stands aside.

Reynolds said the ultrafast broadband initiative would "reshape the industry".

Communications Minister Steven Joyce said he did not have the power to influence Telecom. "Telecom is clearly looking at a range of options to enable it to remain competitive ... As a privately owned, publicly listed company, it is up to Telecom to make its own calls."

Reynolds said yesterday's job cuts were just the start and more cuts were likely in the following three years as the company grappled with sluggish sales and government regulations that were among the toughest in the world.

Telecom announced the cuts hours after warning investors that earnings next year would be up to $100 million below previous forecast and could be $150 million below forecast the following year and $205m down in 2012-2013.

Its shares slumped 6 cents to $2.18, near its record low.

In a leaked email, Mr Reynolds told staff the cuts were a "first step" and restructuring was already underway. "I'm committed to running this process as fairly and openly as possible. I will keep being up front and honest with you ... even if it is not the news you want to hear."

One Wellington staffer said the announcement had come "out of the blue" but colleagues were generally philosophical. "Telecom is a place where restructuring has always been a constant."