Telecom split confirmed

August 2nd, 2010 at 7:22 pm by David Farrar

Stuff reports:

has confirmed plans to split into two businesses in a bid to take part in the government’s ultra fast broadband scheme.

The company said today it proposed to create a new company, “2” as a separate standalone entity through a demerger – a process giving existing shareholders pro rata stakes in the new company.

I have been a long-term proponent of structural separation, and believe it will be good for shareholders and good for the country.

While on separation day, the shareholdings of the two companies will be the same, over time they will attract different profiles of shareholders. The main Telecom will be a competitive business paying higher dividends, but with more risk involved.

Chorus will be an infrastructure company, paying lower dividends, but with much guaranteed business. In time I would expect companies like Infratril to seek stakes in it.

While the Government will claim the decision is nothing to do with them, the reality is that by setting rules around ownership for the to the home initiative, the Govt has been the catalyst for this decision which will correct a major problem of the last 20 or so years – a vertically integrated monopoly. The removal of vertical integration means we will get better choice and competition at wholesale and retail levels.

Telecom’s decision to split Chorus off will significantly increase its chances at winning some or even all of the regions for the fibre initiative. However it does not mean they are automatically the preferred choice. Companies like Vector may be able to do it cheaper in Auckland because of their existing infrastructure.

Structural separation is a pre-condition to full involvement in the fibre initiative, but it is not a guarantee of success.

There may be options out there though, such as Chorus gaining the nation-wide contract and sub-contracting companies like Vector and Citylink where they already have assets. Or Chorus could buy a company like Citylink.

Alternatively the Regional Fibre Group could get ambitious and aim to buy 51% of Chorus. It is going to be an interesting two to three months.

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8 Responses to “Telecom split confirmed”

  1. tvb (4,210 comments) says:

    when Telecom was sold off to the highest bidder by the Labour Government in the late 1980s it was obvious back then it was a “quick flick” designed to get the highest price. The kiwishare did mitigate that to some extent. But it was a fairly slap dash sale. It destroyed the politics for privitisation in NZ for over 20 years. The $4 Billion simply went into the Crown account and paid off some debt. There was nothing tangible to show for it. Richard Prebble’s cheeky brillence made it possible watched over by a sanguine Roger Douglas. Now we are finally at where we should have been all those years ago.

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  2. noskire (832 comments) says:

    An interesting aritcle and subsequent debate on the National Broadband Network vs Wireless in Australia for anyone who is interested http://www.computerworld.com.au/article/351043/nbn_101_case_wireless_broadband/

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  3. peterwn (3,165 comments) says:

    This sort of vindicates Max Bradford’s policy to split electric lines business from generation/retail business. The previous lines/retail companies were often using every dirty trick in the book as well as some others to retain a monopoly over the small to medium customer base.

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  4. burt (7,829 comments) says:

    peterwn

    The lefties use to agree with the separation of generators/retail until the govt didn’t stop the massive profit taking and the retailers couldn’t be blamed for high consumer pricing. Now they seem to want it back as a state monopoly so nobody is any the wiser about what it really costs to deliver it to the home.

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  5. burt (7,829 comments) says:

    tvb

    Now we are finally at where we should have been all those years ago.

    Exactly.

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  6. RKBee (1,344 comments) says:

    And Labour are now where they should have been all those years ago.

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  7. reid (15,970 comments) says:

    This isn’t political in any way. Telecom was done and dusted 20+ years ago. We have what we have.

    What this is about, is the management and operation of NZ’s comms infrastructure and that’s significant and can’t be dealt with in this post alone.

    Questions I have, ottomh (off the top of my head):

    How does wireless interface with optics: seamlessly or otherwise?

    Why does optics generate better performance than wireless?

    If I was buying long-term shares in a connectivity company, would I be better off in a wireless or in a fibre coy?

    What else can fibre be used for other than super-fast www connectivity and apart from educational applications, how is that intended to generate wealth?

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  8. Andrew (60 comments) says:

    reid – wireless technologies still need fibre backhaul, most mobile sites have fibre cables running to them for example. SO you cant do decent wireless without fibre connectivity. But, from a users pov, it is generally slower and less reliable, but as more spectrum is freed up speed should improve.

    DPF – im not so sure the retail arm would be quite so rosey. There are some big questions that need to be asked about the wisdom of this whole investment in terms of our sharemarkets – Labour wiped $2bn off the NZX when it operationally separated telecom, all that money went out of NZ, it didnt move to other NZ companies, it went back to the USA. The same thing will likely happen this time round too – so what does that say about the business friendly govt we elected and the party I joined years ago? Fletchers will be the only half decent stock left which isnt exactly saying much – i think this is a real issue and its disappointing that a guy we put so much faith in when he was party GM seems to be now set on further ripping the guts out of our economy. I just dont get it.

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