Who wants to buy telco AAPT?

Telecom NZ expected to sell off its AAPT subsidiary

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 21, 2013 2:16 pm AEDT

Telecom New Zealand (ASX: TEL) has put its Australian telecommunications company AAPT up for sale, in a deal that could be worth more than $400 million.

The Australian Financial Review (AFR) reports that Goldman Sachs is managing the deal, although nothing official has been released by Telecom. AAPT owns around 11,000km of interstate fibre optic cabling, its own data centres in major capital cities and has fibre access to 1,600 premises, according to Telecom's latest annual report. AAPT also has access to DSL coverage in over 400 exchanges focused on major cities and large metropolitan areas.

But AAPT is a business that is going backwards at a rate of knots. In 2012, Telecom boasted that the company had more than 6,000 business customers and 300 wholesale customers. In 2013, Telecom says AAPT served more than 5,000 business customers. In 2012, AAPT reported earnings before interest, tax, depreciation and amortisation (EBITDA) of $67 million. By 2013, that figure had fallen to $57 million, a drop of 14.9% driven by customer churn, pricing pressure and market consolidation, according to Telecom, despite emerging from a period of cost reduction and operational improvement.

AAPT has also seen its revenues drop steadily from NZ$900 million in 2011 to NZ$515 million in 2013, although the company did sell off its consumer division in September 2010.

The question is, who is the likely buyer of AAPT and its assets?

Australian telcos iiNet (ASX: IIN), TPG Telecom (ASX: TPM) and M2 Telecommunications (ASX: MTU) could all be potential buyers, although iiNet and TPG have their own fibre networks. M2, on the other hand, is forced to buy network capacity from the likes of Telstra Corporation (ASX: TLS), so it may be the most likely buyer.

Optus and Vodafone could also potentially be thrown into the mix, although both Telstra and Optus compete with AAPT for business and wholesale customers, so AAPT's assets may represent duplicate assets, as well as attracting Australian Competition and Consumer Commission (ACCC) concerns.

Foolish takeaway

With a swathe of companies listing on the market amid the current popularity of IPOs, I wouldn't be surprised to see AAPT list on the ASX although a cash sale is also on the cards.

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Motley Fool writer/analyst Mike King owns shares in M2, TPG Telecom and Telstra.

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