Structural Separation Options

May 31st, 2010 at 9:00 am by David Farrar

Tom Pullar-Strecker writes:

The proposal that the Government take a direct stake in ’s network arm is alive and well, after briefly being misdiagnosed with an acute case of “copper-poisoning”.

Telecom chief executive Paul Reynolds was leaning towards a full demerger of Chorus when he briefed analysts on options for the possible breakup of Telecom on Thursday, the idea being that Telecom shareholders would be issued with shares in Chorus, which would become a separate listed company.

But the two options are not incompatible. The Government could take a stake in Chorus and the remaining shares could be distributed to Telecom shareholders. Indeed, that may be the best outcome. Nor is there a reason why Telecom shouldn’t be allowed to retain a minority stake in Chorus under that or any other scenario. The more investors the merrier.

I am supportive of structural separation of Telecom. And I believe the preferable way to do it, is to issue all existing share-holders direct shares in Chorus. Over time they would attract infrastructure investors seeking lower but safer returns, while Telecom would attract investors in a competitive higher profit arena.

I would place a limit of any “customer” of Chorus owning more than a certain percentage – say 5% or 10%.

It makes no sense for the Government to set up a separate company to partner with a demerged Chorus to lay to three-quarters of New Zealand under its ultrafast broadband (UFB) investment initiative. After talking to Mr Reynolds following the investor briefing, it is clear that is not what he is suggesting.

“We see a demerged business, somewhat related to the existing Chorus, containing both copper and fibre into which the Government and Crown Fibre Holdings could invest on a nationwide basis and with which others could partner. The concept is you are building one national access business that has copper and fibre in it.”

This is certainly an option. One could put the $1.5 billion into Chorus as capital, with special shares not requiring a dividend (for example).

However one has to also be careful with assuming that even a structurally separated Chorus is automatically the most efficient and effective provider of fibre to the home in all areas.

From what I have seen (including a detailed study of the likely costs), electricity lines companies (such as Vector) will be able to roll out fibre to the home considerably cheaper than telecommunication companies due to their existing assets and resources consents. Vector for example has a strong case in Auckland.

There may be a win-win though if Chorus sub-contracted work in certain areas to companies such as Vector and Citylink, if they can do the job more efficiently. Maybe Vector would even want to take a stake in a separated Chorus?

We also have Axia from Canada in the fray, with considerable experience in rolling out fibre. They also may be offering a cheaper or better option than a separated Chorus. I don’t know, not having seen their bids.

I regard it as a major plus, that the process to date has led to Telecom willing to go down the structural separation path. However that does not mean they are automatically the successful bidder.

The decisions in this area will have a profound impact on NZ infrastructure for the next 30+ years. For my 2c the Government should not rush into a decision. It is much more important to get this right, than to worry about whether or not the actual roll-out starts on schedule.

6 Responses to “Structural Separation Options”

  1. MikeNZ (3,233 comments) says:

    won’t work

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  2. LC (162 comments) says:

    So this explains the Chorus adverts on TV – with no reference at all to Telecom.

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  3. Richard Hurst (1,246 comments) says:

    Oh separation is easy:

    1. Strap Paul Reynolds onto table.
    2. Hand electric saw to Telecom shareholders or XT customers.
    3. Stand back.

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  4. wreck1080 (5,056 comments) says:

    Reynolds is a disaster is he not.

    For the amount of cash he is getting paid, telecom should have already been turned around.

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  5. MikeNZ (3,233 comments) says:

    It started when our Govt gave away the backbone to the country instead of us owning it and marketing the rights to use and develop it as an as a contract with investment partnership to develop it properly for all of us not shareholders.

    same should have happened with KiwiRail.

    We are too small a market for multiple entities (all making a profit to send back to where?) and still giving us the best prices we can get.

    The same can be said for the Electricity market, where we are being rorted by National’s Max Bradford’s set up which will always screw us as the companies make the best profit (even delaying new developments) they can out of a monopoly situation as we can go nowhere else.

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  6. barry (1,234 comments) says:

    Ha , ha, ha,

    What a bloody laugh…… remember GDC.?
    They were independant contractors to telecom……
    …………..until telecom changed suppliers.

    GDC went broke (I mean – what other copper lines telecoms company could they contract to, so as to spread their risk).

    Same will happen to any separation of Chorus – it will look fine until someone offers a lower cost contract – and then its ‘Fuck you – chorus shareholders’

    Just like what happened to GDC

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