Hamish Fletcher

Business reporter for the NZ Herald

Questions hang over 2degrees' future

Eric Hertz' death in a plane crash leaves 2degrees in need of a strong guiding hand. Photo / Brett Phibbs
Eric Hertz' death in a plane crash leaves 2degrees in need of a strong guiding hand. Photo / Brett Phibbs

2degrees lost a guiding hand with the death of chief executive Eric Hertz last weekend at a time when the company faces the challenge of getting revenues to match its share of customers.

Since launching in 2009, the company has experienced rapid growth, snaring more than 1 million mobile connections - or an estimated 21 per cent of the market.

2degrees now employs 750 full-time staff and according to a spokeswoman is running an operating profit.

While its expansion has exceeded expectations, just where does it go from here?

Given the size of New Zealand, it's not as if 2degrees can go out and get another million customers easily, said IDC research manager Peter Wise.

The firm accounts for only 12 per cent of total mobile revenue and has a disproportionate number of low-value customers.

"There is no doubt that 2degrees has done a great job for competition in New Zealand," said Australian-based analyst Paul Budde.

"However, the question is whether its business model is viable given its extremely low margins."

If the situation the company was in did not change, it was "highly likely" 2degrees would become a takeover target, Budde said.

Craigs Investment Partners research analyst Arie Dekker said 2degrees clearly needed to lift its revenue if it was to get to a profitable position.

As a ballpark figure, Dekker said the company probably needed revenue share in line with its market share.

"It's a long way short of that," Dekker said. "It's not just about getting to break-even. I mean, these are capital intensive businesses they need to get to a level where they are actually getting a return on capital," he said.

Another industry analyst, who did not want to be named, said 2degrees needed to get its revenue share to about 15 to 20 per cent to break even and higher than that to survive longer term.

One of the challenges in 2degrees' fight for a bigger slice of the country's $2.5 billion annual telecommunications spend was its lack of fixed-line products.

This means that unlike rivals Telecom or Vodafone, it cannot sell packages to customers that include mobile, landline and broadband services.

Hertz indicated last year 2degrees was exploring an entry into the fixed-line market and Wise said it was a "natural place" for the company to go.

"At the serious business end, if they want to address that, big corporates tend to go for whole business propositions which include fixed solutions and mobile solutions and so that's why they [2degrees] will struggle if they're mobile only," Wise said.

In an effort to get a foothold in the fixed market, the company could partner with another provider. Kordia and CallPlus were two possible 2degrees partners suggested by some in the industry this week.

Given the time it would take for 2degrees to establish itself from scratch, Dekker said a partnership could be a way for it to accelerate its entry into the fixed-line space.

Analysts say if 2degrees was to strike out on its own, it would need to invest in infrastructure and could need to raise further capital from shareholders to do so.

Capital raising could also be necessary when the company upgrades its network to cater for 4G mobile internet services and if it bids for 700MHZ spectrum to carry this traffic.

Wise said that although 2degrees had indicated the 4G upgrade was cheaper for the company because its network was newer, it was still going to costs "tens of millions" of dollars.

According to media reports, Hertz dismissed speculation earlier this year that 2degrees could list on the NZX in 2013.

The Herald sought responses from 2degrees chairman and interim chief executive Stewart Sherriff on whether it would consider a listing as a means to raise capital.

However, a spokeswoman replied that Sherriff was focused on running the business and working with the board to find a permanent chief executive.

Sherriff arrived in Auckland from the United States this week.

Hertz and wife Kathy are believed to have died in a light plane crash last weekend and the wreckage is still being recovered.

3G auction was starting point for mobile operator

2degrees was launched in 2009 but dates back to 2001 with the formation of Econet Wireless NZ.

This company was a venture between South Africa's Econet Wireless and the Hautaki Trust, the commercial arm of Te Huarahi Tika.

Te Huarahi Tika, which represents Maori interests, was given $5 million by the Labour Government in 2000 and rights to buy a chunk of 3G spectrum at a 5 per cent discount.

Most of these funds were invested in Econet Wireless NZ, which later was known as NZ Communications and eventually became 2degrees.

The Government has not set aside any 4G spectrum for Maori when it is expected to be allocated this year.

The Hautaki Trust owns 10 per cent of 2degrees. Trilogy International bought up a 25 per cent stake in 2008 and now owns 60 per cent.

Private equity group Communication Venture Partners owns 29 per cent and KLR Holdings owns 1 per cent. KLR Holdings is 2degrees founder Tex Edwards' investment vehicle.

- NZ Herald

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