Investors spooked as Telecom's broadband bid takes a knock

Telecom has proposed a nationwide bid led by its network business Chorus. Photo / Supplied

Telecom's nationwide broadband ambitions have taken a knock as the Government begins picking infrastructure partners for its billion-dollar fibre network.

Crown Fibre Holdings, the Government's investment vehicle for managing the 10-year fibre broadband network scheme, said yesterday it had begun negotiations with local players in Whangarei, Waikato, Bay of Plenty, Taranaki and South Canterbury.

A further 11 parties have been shortlisted to continue with the process.

Canadian infrastructure player Axia Netmedia has been knocked out.

The remaining bidders are Telecom and a collective made up of lines companies such as Vector and fibre network specialists. The collective is operating under the Regional Fibre Group umbrella.

Telecom has proposed a nationwide bid, led by its network business Chorus that includes a package of regulatory reform to wind back its operational separation agreements, bundling in the separate Rural Fibre Initiative and a plan to split the company into network and retail businesses.

Craigs Investment Partners analyst Geoff Zame said the announcement was clearly negative for Telecom, saying the market reaction was "fair" with overseas investors spooked.

Shares in Telecom closed down 11c, or 5.2 per cent, at $2.02.

"There was obviously the need to show some progress on a major election item and really what it does is ratchet up the pressure on Telecom to come up with a better deal while at the same time providing some encouragement to the lines companies that there is a process that's based on a competitive tender process."

Zame said it appeared the spread between the wholesale pricing Telecom had tabled and what the local lines companies were capable of delivering was quite wide.

"That spread is going to have to narrow if Telecom is going to win the majority of the business."

Crown Fibre Holdings chairman Simon Allen said the three parties selected for prioritised negotiations - Alpine Energy, Central North Island Fibre Consortium and Northpower - had covered off the key areas of build cost, products and access price to the extent that negotiations could begin.

"It doesn't mean there isn't a lot of positive attributes in the other ones, but you can't do everything at once," said Allen.

Forsyth Barr's Guy Hallwright said the announcement meant Crown Fibre Holdings was sending signals to the other bidders that it had three parties that had come up with something it liked and that everyone else should go away and sharpen their pencils.

"I'm still thinking that ultimately the sensible solution is for everybody to amalgamate.

"Maybe that is what Crown Fibre is trying to force because you'd imagine if those guys have both got assets that they could contribute then presumably a conjoint build would be cheaper than either party building on its own.

"Therefore pricing could be lower and therefore it could be more acceptable to Crown Fibre Holdings," said Hallwright.

"I think that's what they are trying to finesse."

Telecom was not commenting on the announcement beyond a press release.

It said it remained open to partnerships with other fibre asset owners including the three in negotiations with Crown Fibre Holdings.

Allen said Crown Fibre Holdings was focused on the best outcome - the best network design, price and access product.

"How you get there we haven't defined. We haven't told people how to do it. That's their job to bid and if that involves people getting together to bid that could be fine. It would be assessed on its merits."

He said Crown Fibre Holdings was only mandated to consider the fibre initiative and any issues for Telecom outside of that, such as its separation and regulatory settings, were complexities the company had to deal with.

Zame said he struggled to see how a partnership within local areas could work given the architecture and IT could vary enormously between players.

"You've got to have confidence in Telecom's ability to take a collaborative approach.

"I don't think there is that much confidence in that ability even though they are saying it. You never know."

CONTEST CONTINUES
* Three parties covering urban areas in Whangarei, Waikato, Bay of Plenty, Taranaki and South Canterbury to begin negotiating with Crown Fibre Holdings.
* Binding offers with those three bidders go to shareholding ministers next month.
* A further 11 proposals have been shortlisted. These are from Telecom and a collective of regional players including Vector.
* Canadian bidder Axia Netmedia knocked out.
* Discussions to continue with shortlisted parties.