Green light for two Telecoms

Paul Reynolds, Telecom chief executive. Photo / Dean Purcell

Telecom has moved to split itself in two in one of the country's biggest corporate shake-ups after winning the lion's share of ultra-fast broadband contracts.

The company's chief executive Paul Reynolds said yesterday's announcement was the end of "considerable turmoil" following months of negotiation and years of uncertainty.

Telecom won almost 70 per cent of the Government's ultra-fast broadband (UFB) tender and will now split its retail and wholesale businesses.

Under the deal, its network-arm Chorus must become a separate public company and will receive $929 million of Government funding to roll out a fibre network in Auckland, the eastern and lower North Island and the majority of the South Island.

Once the rollout is completed in 2020, Chorus will be the only wholesale provider of services on the UFB network.

Although the separation must be approved by both the Government and Telecom shareholders, the company is already preparing and said it would happen by the end of the year.

IDC's Rosalie Nelson said the break-up would fundamentally change the telecommunications market in New Zealand.

"We've come from an environment where one company owned and controlled [the network]. Government policy was about encouraging alternative investment to that network and encouraging competition by providing access to it.

"But with fibre you really can't have duplicate networks, there's not the economics for it, so you have to change the model and you can no longer have everything premised around competing infrastructure," she said.

When fibre is rolled out and the industry transforms, Nelson said competition would be in the retail space and become about the services and applications telcos could provide.

Reynolds labelled the split as an evolution of the telecommunications industry and claimed it was unprecedented across the world.

He said it would allow the company to get away from the confusion of being a regulated network owner as well as a retailer.

Under the separation plan, Chorus will own Telecom's existing copper and the new fibre networks.

Telecom's new stand-alone retail branch will hold on to the mobile network.

Shareholders will get a stake in Chorus equal to their holding in Telecom, and the market will decide the price of each on the day Chorus goes public.

Telecom shares surged in early trading yesterday and reached a 15-month high before midday. They closed up 15.5c, or 6.8 per cent, at $2.43.5.

After tumbling share prices over the last five years, Reynolds said Telecom's win gave shareholders something to look forward to.

"Today's announcement brings enormous certainty to Telecom.

"There's been a cloud of uncertainty over the company for a number of years, a cloud of uncertainty about regulation, or whether Telecom would be the Government's chosen partner and all of that has had a depressing effect on Telecom's share price but I'm very confident that Telecom [and the new company] face a much brighter, a much clearer, better-defined future.

"Shareholders will see a value in it," he said.

Market commentator Arthur Lim said the Telecom restructuring was the biggest corporate reorganisation since the split up of the Fletcher group in the early 1990s.

The shake-up of the country's second biggest listed company could breathe new life into the market, he said.

"You'd have almost been able to the hear the sigh of relief in Australia."

Analysts also saw yesterday's news as a good result for Telecom.

Forsyth Barr's Guy Hallwright called the decision positive and Goldman Sachs' Tristan Joll said there was no doubt that being involved in fibre was a good thing for the company.

"In the context of what was in front of them and how the [negotiating] process has gone, they did as well as what I think they could have done," Joll said.

He said that despite losing contracts in Christchurch, Telecom had signalled it could work with Enable Networks, the company laying fibre in the region.

Telecom said yesterday that it could take a stake of up to 50 per cent in the Christchurch rollout.

Joll also said Telecom appeared to have favourable funding terms from the Government for the broadband build.

Telecom will have to pay back, over the next 15 to 25 years, the $929 million the Crown is giving it for the rollout.

It will also have to invest up to $1.5 billion of its own capital to complete its share of the build.

Nelson said that despite revenues tipped to flatten for the industry over the next five years, the broadband contracts were a win for Telecom.

"After two years of very extensive scrutiny, Telecom wouldn't be doing this unless they could put a good deal to shareholders," she said.

"One of the positives of the [separation] approach is you are splitting two very different business models. Network investment is always high capital expenditure and long payback where [retail] services is far more dynamic, with lower margins."