Telecom shares plunge as separation looms

Telecom shares fell to a new record low today after the company confirmed it is prepared to break up its business to participate in the Government's ultrafast broadband (UFB) initiative.

"The Government's UFB initiative will fundamentally reshape the structure of the entire telecommunications industry in New Zealand and Telecom is therefore undertaking a thorough assessment of the merits of structural separation," chief executive Paul Reynolds said.

The Minister for Communications and Information Technology, Steven Joyce, said he regarded as positive Telecom's announcement that it was considering structural separation as a possible way to become involved with the Government's UFB roll-out.

Telecom shares fell 7c to $1.92, a new record low, in the wake of that statement, but the stock is trading ex-dividend today. From today a 6c a share dividend is no longer payable so the price is technically down just a cent. The shares are now tradinhg at $1.94 each.

Telecom operates its network separately from its retail and wholesale arm since being directed to do so, but has argued against full separation. Today, it said it had also asked the Government to alter, or release it from, three undertakings when its business was separated operationally.

The company has not yet made a decision on full separation. It is also not commenting on speculation in The Dominion Post that it may sell down a majority stake in its network business Chorus to the Government and other infrastructure investors.

The Government is to spend $1.5 billion on UFB, and to be involved, it has been suggested companies can't own infrastructure and offer retail services as well.

Grant Williamson, director at Hamilton, Hindin, Greene, said full separation could be positive for the company in the long run to get it on the right side of the regulators, but it would be costly and the issue was another uncertainty for Telecom.

GoldmanSachs JBWere's Peter Sigley said the proposition of complete separation was not a complete surprise for investors.

People were trying to think through a myriad of options for the company at the moment, with this being just one of them. Telecom was an incredibly confusing proposition for investors, he said.

Chorus boss Mark Ratcliffe has stepped down to head Telecom's efforts to participate in the Government's UFB investment initiative. Last week the company also announced that chief financial officer Russ Houlden was leaving the company.

Telecom's Reynolds said today that the company wanted to align the interests of its shareholders and debtholders with those of the Government and New Zealanders.

"In making a thorough assessment of structural separation we need to have a detailed understanding of the regulatory environment, and this warrants detailed discussion and analysis with Government before any decisions regarding its viability can be made," he said.

"Telecom is required by legislation to deliver significant system and technology projects envisaged for a pre-fibre world. A large proportion of these projects must be deployed this year, so it seems sensible at this time to reassess these projects to avoid significant congestion and waste."

Reynolds said Telecom had asked the Government to consider a variation of three components of Telecom's undertakings that it believed were no longer relevant in a fibre future.

"These three amendments will not impact on the service levels experienced by our end user and industry customers, and will not detract from the expression of interest level playing field. Rather, they reflect how fast the policy and technology environment is evolving in telecommunications," he said.

"In these three areas Telecom, industry participants and New Zealand consumers face significant costs and risks of disruption that were not foreseeable at the time the commitments were made. They also lock Telecom, the industry and the Government into some choices which should be considered as part of the UFB initiative and the potential structural separation of Telecom."

The proposed changes are to:

- Suspend the forced bulk migration of existing broadband customers onto a new copper-based broadband service. Telecom will continue to supply this new broadband service to all new customers;

- Remove the requirement for Telecom to migrate 17,000 customers onto a new Voice over internet Protocol copper service by the end of this year; and

- Remove the requirement for Telecom to build a new set of wholesale systems that are not consistent with the industry structure implied by UFB.

Joyce said he had received a request from Telecom for the Government to consider a further variation to the company's operational separation undertakings.

He was conscious of the importance of certainty around the issues raised and would expedite Telecom's request through the usual process with an open mind.

Telecom has previously asked for three variations since they came into effect on March 31, 2008.

"A potential structural separation of Telecom would involve a number of complex regulatory issues to work through. I am encouraging Telecom to work with Crown Fibre Holdings (CFH) and the Ministry of Economic Development."

Joyce said the CFH process provided for potential partners to raise regulatory issues that were relevant to any bids and Telecom was not the only industry player to have done so.

"There have been a number of positive recent developments from potential partners as momentum builds in the ultra-fast broadband initiative. Clearly potential partners are working hard to put their best foot forward."

- NZPA