Telecom asset split could be positive in time: Moody's

Telecom could win back lost revenue from people abandoning its fixed-line copper network by taking part in the Govt's proposed broadband project. Photo / Brett Phibbs

A move by Telecom to split off its network division would have negative credit implications in the near term, but positive results could emerge over the longer term, Moody's Investors Service says.

Telecom said last week it would consider structurally separating its network and retail assets into two companies so it could take part in the Government's proposed ultra-fast broadband (UFB) project.

In the near term, a divestiture by Telecom of its core copper network, which provided reliable revenues and high margins, had negative credit implications, Moody's said today.

But over the longer term, positive results could emerge if the UFB project allowed Telecom to boost its broadband revenue and as part of the deal, diminish its regulatory compliance costs.

Subject to the final form of any spin-off from Telecom and the deployment of any consideration received by the company, structural separation was likely to be credit negative as it would lower Telecom's profitability and reduce the strength it gained from vertical integration.

For the former monopoly telco, legacy copper phone lines were a monopolised asset that provided barriers to entry for competing operators to establish their own fixed-line networks. The legacy lines still generated high, although declining, margins, Moody's said.

Telecom's fixed-line services, like those of most major incumbent operators, were gradually declining as consumers increasingly chose wireless usage and dispensed with wire lines by, for example, using a mobile phone as their home phone.

Longer term, Telecom could win back some of that lost revenue by competing in the UFB project to provide high-speed services, which tended to grow rapidly.

The form of that competition and Telecom's likely positioning would depend on the role.

Telecom assumed in the UFB project, which was likely to be funded as a 50-50 public-private partnership.

Having undergone a functional separation of its operations, at the Government's insistence, in 2008, Telecom would go a step further if it decided on a structural separation. Telecom would no longer be allowed to retain ownership of each segment of its operations.

A critical component of the equation for Telecom would be whether and to what degree the Government was willing to diminish its current high degree of regulatory oversight and price control over the company, should Telecom achieve such a form of structural separation and find itself on a level playing field with alternate network providers.

Other key credit issues would be the form of any spin off, whether it was a straight demerger or full/partial sale, the eventual deployment of any funds received, and the ultimate capital structure employed.

Ultimately, the Government wanted to introduce more competition with the aim of bringing advanced communication services at lower prices to consumers, Moody's said.

"To do so, it must break an incumbent's vertical hold on key segments of infrastructure with the reward of participation in, or penalty of exclusion from, the Government-subsidized UFB network as inducement."

- NZPA