Breaking up not so hard to do?

Telecom did nothing to scare the markets when it released its demerger documents earlier this week. The vote to separate New Telecom and New Chorus seems a sure thing. Business editor Dene Mackenzie talks to analysts about the prospects for the two companies.

Telecom received some guarded support from analysts when it released its demerger scheme booklet this week and surprised some by its bullish profit forecasts.

Telecom shareholders will vote on October 26 on splitting the company into two entities, New Telecom and New Chorus. The vote seems a foregone conclusion given board and institutional support.

Craigs Investment Partners broker Chris Timms said there were no separation anxieties.

"We remain comfortable with the operating and valuation outlook for Telecom as it gets set to demerge the Chorus business."

Investors would end up with two shareholdings after the demerger. The bulk of earnings and free cash would initially sit within New Telecom.

"As expected, its capacity to absorb the build of Telecom's debt means that its equity valuation is reduced."

Forsyth Barr broker Suzanne Kinnaird said the scheme documents contained no forecasts or forward-looking statements from the company although there were full-year 2012 operating profits, from the Grant Samuels report, of $650 million for New Chorus ($676 million in 2011) and $1.15 billion for New Telecom ($1.12 billion).

Independent reports were typically based on management forecasts.

The document revealed separation transaction costs of up to $120 million plus $20 million to $30 million in additional costs. That was lower than Forsyth Barr's previous $200 million estimate, although the documents did not reveal anything about ongoing additional costs, she said.

Forsyth Barr's valuation for New Chorus was down 20% to $5 a share and New Telecom was up 27% to $1.65, Ms Kinnaird said.

Two weeks ago, Forsyth Barr valued the current combined Telecom at $2.55 a share but had increased its value to $2.65.

"We believe Telecom shares are likely to trade broadly sideways in the lead-up to the shareholder vote as investors get to grips with the detail in the documents and attend the roadshow presentations.

"In the meantime, with the share price so close to our valuation, our recommendation is hold," Ms Kinnaird said.

Craigs had a target price of $2.88 for Telecom, increased from $2.81, and a buy on valuation.

Mr Timms said Grant Samuels believed the proposed separation was in the best interests of shareholders.

Craigs had a midpoint share price of $4.37 for New Chorus and $2.01 for New Telecom.

New Chorus was likely to report for the first time in June 2012, presumably for a seven-month period. New Telecom was expected to report its interim result for the six months to December 2011 in February.

Mr Timms said the independent report assessed previous ASX demergers, saying, on the balance of evidence, demergers generally added value, though there were the usual caveats because of a lack of knowledge of things such as what the share price would have been without the demerger.