Where to for Chorus

December 3rd, 2013 at 9:00 am by David Farrar

The decision by every other party and MP in Parliament (and the Conservatives outside it) to oppose legislating to overturn the decision on the price of copper was both bad and good for the Government.

The bad is that legislation was obviously a preferred option for the Government, even though the Telecommunications Review was only a discussion document. It is true that they had some weeks ago started to back off that route, and look at other options, but their statements up until then had quite strongly been in support of legislation.

I think it is a fair criticism that the Government should have talked to other parties at an earlier stage about whether they would support legislation, rather than fairly forcefully support it, and then realise you can’t do it.

So while the political management hasn’t been optimal, the upside is that having Parliament assert its right to say no to the Government, does actually assist the Government. It removes the legislative option off the table, and will I believe lead to more constructive dialogue between all parties on where to go from now. The members of the Coalition for Fair Internet Pricing (Kiwiblog is a member) will I believe be keen to engage constructively not that the risk of over-riding the independent regulator is gone, and can’t demand the Government do something it is clearly incapable of doing.

The decision by Amy Adams to have an independent financial review of Chorus was an excellent one (and something I had called for), and the way I see it is there are four steps ahead of us on resolving this issue They are:

  1. Does Chorus have financial problems under the current settings, and the Commerce Commission determination?
  2. If the answer to 1 is yes, Are there changes Chorus can make to solve those problems themselves?
  3. If the answer to 2 is no, then what are the factors that got Chorus into this state?
  4. If the answer to 2 is no, then taking account of 3, what options are open to the Government, and which are preferred

We will soon get the answer to No 1. I am sure it will be a comprehensive report. I’ve had a financial modelling expert take me through what they expect the report will find, and that it will conclude on current settings Chorus will breach their debt financing agreements – specifically the acceptable ratio of debt to EBITDA. The Commerce Commission determination will increase debt and decrease EBITDA and this means the banks could withdraw their loans to Chorus which could plunge it into an Air New Zealand type situation.

Note that this does not mean Chorus will be bankrupt or even unprofitable. The report could well conclude that over the next six years or so Chorus will still make small profits, and even have marginally positive cashflow. The issue is likely to be mainly around debt and timing of cash requirements.

So if the answer to 1 is yes as the Prime Minister has (correctly it seems) warned, then we get to whether Chorus can make changes themselves to prevent a breach of their debt agreements, or can renegotiate their financing.

Obviously one change is a reduction of dividends. I say this with sadness as a Chorus shareholder, but if you have a debt problem, then you can’t expect to pay out dividends. Once you are getting the full benefits of the investments, then they would resume I expect. I note Chorus has already started to head down this path by saying their proposed dividends are likely to be reduced.

It is unlikely that change would be enough. So the report needs to also look at whether other changes will be enough to prevent a debt default. Can opex be reduced. Can capex be delayed.  With that in mind we note the story yesterday:

Network company Chorus is flying about 200 staff from Wellington to Auckland today for an annual get- together – despite “crying poverty”.

Mr Bonnar said Chorus had twice been recognised as one of the best employers in Australasia, “and a big part of that is once a year we get all our people together”.

“It’s to hear from the senior people in the business where the organisation is at, where it’s going, what its strategy is and how what they do fits in with it.”

Now I don’t have a problem with Chorus doing this as a private company. But if you are sticking your hand out for Government assistance, then decisions like this will face public scrutiny. The cost is minimal to their overall opex, but taxpayers will expect Chorus to be as fiscally frugal as possible, before any additional taxpayer money is considered.

But what happens if the report concludes that Chorus does both have a debt problem, and can’t solve it internally. Well then I think you need to identify the factors that got Chorus into this state. I don’t mean a blame game, but identifying what contributed. Obviously the Commerce Commission determination is a significant factor, but is it the only factor? Have there been UFB cost over-runs? Was Chorus too close to the debt rations anyway, regardless of the determination?

Then after you have identified the factors involved, do you look at potential outcomes for the Government and Chorus. Off the top of my head, they include:

  • Chorus defaults on its debt (highly undesirable)
  • Chorus defaults on the UFB build (highly undesirable)
  • Chorus renegotiates the debt (would banks agree?)
  • The Government guarantees the debt for Chorus (the banks may call it in immediately)
  • The Government makes the repayment schedule for the UFB build financing longer (will it make much difference?)
  • The Government loans Chorus more money
  • The Government slows down the UFB build (undesirable)
  • The Government takes a stake in Chorus

I’m not against the last option. In fact the Government already has some preference shares in Chorus as part of the UFB contract. When it comes to commercial trading companies, I believe the Government shouldn’t own any shares at all. I’d sell 100% of the power companies etc. However just as I can accept the state should own Transpower as the national electricity grid, there is a case that the national fibre and telecommunications grid should be a government utility also.

Put it like this, if you were back in 1987, knowing what you know now, you would have split NZ Post telecommunications division into a Telecom and a Chorus on day 1, and have sold Telecom and kept Chorus. You sell off the competitive elements and own and regulate the monopoly.

So I’m not ideologically against the Government taking a stake in Chorus. It also would mean that both current Chorus shareholders and the Government would both share in the pain of getting Chorus out of its debt problems – which is preferable to it being just the Government (or worse Internet users as originally mooted).

To a degree, I’m getting ahead of myself. Let’s see what the report says on 1, 2 and 3. Then we can focus on the “least bad” option for ensuring Chorus can deliver on the UFB project and 75% of New Zealand homes get fibre access to ultrafast broadband.

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33 Responses to “Where to for Chorus”

  1. alex Masterley (1,538 comments) says:

    We also need to see the outcome of Chorus’s appeal to the High Court which is being initiated at the moment.

    That may mean a return to the status quo.

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  2. Ed Snack (1,941 comments) says:

    So what you are basically saying is that Chorus will be restricted from making a profit by Commerce Commission fiat and the answer has to be that Chorus slims down (aka reduces staffing and support levels from what is already marginally inadequate) or Chorus goes broke. Perhaps you might consider that the Commerce Commission has screwed up their determination royally and needs to reconsider ?

    I have a suggestion, why not make the commerce commission members personally have to pay a proportion of the losses Chorus is likely to suffer because of their incompetence and inability to carry out a fair and reasonable assessment of the cost of maintaining the copper side of Chorus’s business ? Might make them less open to grandstanding about something they appear to know fuck-all about.

    It seems that everyone is always pleased to be seen to be being generous by giving away someone else’s money these days.

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  3. xy (202 comments) says:

    While you’re looking into the causes of the problem, find out whether Chorus deliberately underbid for the UFB rollout in the first place.

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  4. s.russell (1,651 comments) says:

    Re the political management, I can see that earlier establishment of the position of other parties would have made everything smoother. But I also note that those other parties have an interest in not helping with that.

    I do not know what actually went on behind closed doors, but it is clearly in the interest of a party like UnitedFuture to say at first “maybe” – allowing matters to proceed – and then later say “no”. This gets them publicity as the party that stopped the Govt’s evil plan to do X. (As opposed to warning the Govt off the plan at an early stage and getting no publicity at all). And Opposition parties have every interest in seeing Govt plans derailed.

    So the better political management that might have been desirable may not have been possible.

    I further note that this is a two-edged sword: seeing little parties derail Govt plans may actually boost support for National, and reduce sympathy for parties such as UP and Act among right-leaning voters.

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  5. peterwn (3,341 comments) says:

    An issue that may or may not be relevant is the ‘basis’ of Chorus’s share price at the time of split. It has been recognised for some years that the days of Chorus’s copper network is limited, but how many ‘days’ has been the issue. As things stand today, alternative copper network valuations would be a) based on infinite existence with rolling renewals and expansion as need be, and b) a finite period plus scrap recovery (to the extent it is in ducts). As the writing has been on the wall for some time, valuation b) would be more apt and it is not the copper users’ problem if the market had assumed approach a).

    The concern here is, to what extent would driving a hard regulatory bargain drive away investment in regulated or for that matter unregulated ones.

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  6. tvb (4,563 comments) says:

    What really really really is the problem. Is it the copper wire network is subsidising the rollout of the fibre network?? That seems to be the case and the lower prices for copper as determined by the Commerce Commission has exposed that. In other words Chorus bid too low in order to get the fibre contract. The Government is sidetracking this issue least it frighten the horses. We had the clumsy attempt at legislating a solution to keep copper prices high. So it is back to the drawing board. I think we have a serious mess on our hands and John Key needs to fix it. So far I get the impression no-one wants to deal with it.

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  7. gazzmaniac (2,306 comments) says:

    DPFs preferred options:

    The Government loans Chorus more money
    The Government takes a stake in Chorus

    How are those preferred options? Both cost the taxpayer money.

    Undesireable option:

    The Government slows down the UFB build (undesirable)

    How is that undesireable? It will save the taxpayer money on a project that most people don’t care about, and Chorus won’t have a cashflow problem any more.

    Let Telecom, Vodafone and 2degrees roll out 4G and see what happens.

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  8. unaha-closp (1,067 comments) says:

    If Chorus goes bust, there is a brief moment of turmoil and then somebody new will buy the assets. The world is full of Telco companies who would like the job and masses of zero% interest available for them to finance the costs.

    At the moment there are three possible reasons Chorus is maybe going bust:

    1, Chorus is a useless company of incompetent morons.
    2, Chorus is a rent seeking bunch of would be crony-capitalist a**holes using fraudulent behaviour to secure government largesse.
    3, The regulatory environment Chorus operates under is flawed and inherently unprofitable.

    We should let them go bust, just so we can rule out possibilities 1 & 2.

    If it occurs subsequently that 13 or 14 equivalent new owners of the network go bust one after the other, then we can maybe start to look at the possibility that there might be a structural flaw in the regulation.

    Only a weak government would cave at the first demand.

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  9. Jack5 (5,291 comments) says:

    I agree with Gazzmaniac (10.28 post). Slow the project down. The market has changed. Forget the campaigners for fibre to the home, who seem to be led by TUANZ, an industry lobby group.

    The huge swing to smart phones and tablets from desktop computers and now laptops, and the strong part-reliance of smart phones (and to a lesser extent tablets) for cellphone network access to the Internet, has changed the speed of growth in fibre demand, at least from consumers.

    Who now needs it, apart from couch potatoes addicted to downloaded video? The number of home businesses who will benefit from the high upload speed is tiny.

    Fibre to the home is way ahead of demand, and might not be the optimum distribution system for broadband in the near and medium future. Consider what richer Australia is doing with fibre to the node, which was Telecom’s plan until the interest groups began agitating.

    The emerging fiasco with Chorus is darkening the whole private-state asset partnerships plan.

    Labour’s Cunliffe imposed unbundling of the copper network on Telecom (before Chorus was split off, of course), which cost tens of thousands of investors, including tens of thousands of mums and dads, a total of billions

    In a campaign whose public figurehead is Hooton, who purportedly represents the Right on Radio NZ, National is being forced into a corner where it may screw Chorus’s shareholders.

    It’s a bit like many farmers used to want: socialism for us, capitalism for everyone else.

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  10. stigie (1,458 comments) says:

    DPF, you wrote that Chorus will be paying out reduced dividends. I read somewhere that they will stop paying out these dividends for approx 2 years. Can someone clear this up, or is it too early to know at this stage ?

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  11. Jack5 (5,291 comments) says:

    Unaha-closp at 10.48 is wrong in postulating that his three reasons are the only possible reasons for Chorus’s problems.

    The outstanding reason is that fibre-to-the home is a crock for now and the near-term future.

    Even if it wasn’t, it would be followed by a new bottleneck, in cross-Pacific access. If that were solved there might well be congestion problems in the United States the big source of Internet content for these remote islands of NZ.

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  12. RightNow (7,016 comments) says:

    Kill the UFB, fibre is already available to anyone prepared to pay the price without government subsidising it. If you can’t pay for it you don’t need it.

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  13. emmess (1,398 comments) says:

    Whats the big deal about a 3x increase in speed anyway?
    It would be barely noticeable these days. We have had bigger increases in the past such as going from dial up to ADSL without much fuss.

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  14. Jack5 (5,291 comments) says:

    Re Stigie (at 11.01):

    Raising Chorus’s dividend is misleading.

    Since Chorus’s share price has dived, the last year’s dividend as a proportion of the new low price looks quite high.

    But it’s sophistry to force down a company’s share price, and then compare the dividend with the current share price and say, “There’s room to cut that.”

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  15. OneTrack (3,384 comments) says:

    “What really really really is the problem.”

    The problem is nobody, except early adopters, really wants to pay for fibre when they can get cheaper copper. Wow – who would have seen that coming?

    This is what happens when center-left governments interfere in the market.

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  16. OneTrack (3,384 comments) says:

    “If Chorus goes bust, there is a brief moment of turmoil and then somebody new will buy the assets”

    You mean the government/taxpayer will buy the assets. Because nobody else will, when there is a socialist commerce commission sitting in the wings always ready to trash your business plan because kiwis want cheap stuff.

    Chorus is virtually worthless now, as DPF is starting to realise.

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  17. OneTrack (3,384 comments) says:

    “Whats the big deal about a 3x increase in speed anyway?”

    Well, I could do with a 3x increase in speed.

    But VDSL would have done that for me, if Chorus had been left to their own devices. Now the Commerce Commision has screwed Chorus over big time, so I aren’t going to get VDSL (Chorus wont be able to afford to continue with more cabinets), and I probably aren’t going to get Fibre either because that will be severely delayed or cancelled.

    Thanks guys – high five.

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  18. unaha-closp (1,067 comments) says:

    Jack5,

    I’d put that under category 1, as an example of idiots making bad investment decisions.

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  19. Jack5 (5,291 comments) says:

    Looks like Key has caved in to Hooton, Possum Dunne and Co, and will put more taxpayer money into the fibre-to-the home fiasco. Stuff has him saying:

    “If we delay that rollout we ensure New Zealanders are behind the eight ball at a time we want New Zealanders leading the world, not behind the world.”

    And this will end four decades of consecutive current-account deficits? What are you waiting for, Tonga, Haiti, Kiribati, Mali?

    Am I alone in thinking that with this, National seems to be moving from centre-left to left-centre-left?

    At least if the Government pumps in more money, it should be smart enough to take ordinary shares in Chorus, not the semi-equity it’s already committed to with the zillions it is pumping in for fibre-to-the-home.

    The inflexibility to change course on fibre to the home contrasts with Telecom under Roderick Deane, when it stopped dead its rollout of cable to the home in Auckland as soon as it realised that ADSL would make the copper phone-line network able to carry fast broadband.

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  20. OneTrack (3,384 comments) says:

    “Am I alone in thinking that with this, National seems to be moving from centre-left to left-centre-left?” No.

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  21. unaha-closp (1,067 comments) says:

    You mean the government/taxpayer will buy the assets. Because nobody else will, when there is a socialist commerce commission sitting in the wings always ready to trash your business plan because kiwis want cheap stuff.

    The new owners would be buying for a lot less than Chorus paid for the assets, there would be plenty of companies willing to take the chance.

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  22. backster (2,197 comments) says:

    The Commerce Commission if they are needed at all should not have the right to set prices. If needed they could be advisers to the Government. The choice we now have is state control under Labour, or state Control under the fat cat lawyers who comprise the Commerce Commission. They haven’t just destroyed Chorus and the superannuation of investors like me. They have destroyed confidence in the sharemarket especially in those sound companies which have earnt a dominant position by good management. The Energy companies are all retreating as investors especially overseas investors realise if Labour doesn’t get you the Commerce Commission will. Contact (a good company) is now at the same level it fell to five years ago at the Great Financial Crisis and all the other energy companies are the same, but Fletchers, Infratil and the like are also under threat and the sharemarket is in retreat at a time when it should be gathering steam. How the ACT party can line up with the truly socialists parties to render the government impotent disappoints and baffles me. If profiteering from a monopoly position is the problem a Crimes Act clause should suffice not an omnipotent cabal of fat cat lawyers called the Commerce Commission.

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  23. Jack5 (5,291 comments) says:

    Unaha-closp posted at 11.46:

    …there would be plenty of companies willing to take the chance. ..

    No way. Definitely not, Unaha-closp. Not after the change in market demand with the surge in wireless access with smart phones (and to a lesser extent tablets), and not after the costs of layout have been established by Chorus.

    Don’t forget the taxpayers, who will hold semi-equity (I think non-preferential) would also be hurt by any fire sale of the company.

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  24. GJM (66 comments) says:

    I would be willing to settle for getting ADSL, which Chorus aren’t interested in providing to my business, despite bign 50km from teh Auckland CBD, and i can see the skytower from my office window.
    If I bid for a job, and under cook it, it is my problem. Let Chorus sort out their own mess, and don’ t use my money to do it.

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  25. OneTrack (3,384 comments) says:

    “If I bid for a job, and under cook it, it is my problem.” What about if you already had other jobs in play and then somebody in Wellington announces your profit on those jobs is suddenly zero? Unfortunately, since there is now no profit to be made out of new copper installations, I cant see Chorus (or anybody else) adding more ADSL connections (especially those 50km from Auckland :-( ).

    What about 4G or is that what you are doing now?

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  26. Jack5 (5,291 comments) says:

    GJM posts at 1.20:

    …If I bid for a job, and under cook it, it is my problem.. .

    And if the market changes, it’s your problem, too. Who foresaw the smart-phone, tablet, cell-wireless wave coming like a tsunami?

    If this has changed the whole outlook for fibre, altering forecast take-up, the choice seems to be either slow the rollout or change the financing arrangements.

    Kiwiblog’s legal lurkers, please help here! I’m no lawyer but could such a market change be a force majeure “out” for Chorus? I quote the Wikipedia definition of force majeure in contracts:

    Force majeure is generally intended to include risks beyond the reasonable control of a party, incurred not as a product or result of the negligence or malfeasance of a party, which have a materially adverse effect on the ability of such party to perform its obligations…

    Would technology advances that led to smart phones and tablets count in this?

    GFM, as for your complaint about Chorus not getting ADSL to you 50km from the Auckland CBD: taxpayers are shelling out hundreds of millions to get ADSL to rural NZ. In the near to mid-term that’s got far more economic pay-off than fibre to the home, IMHO. I hope you get your access without an unreasonable wait.

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  27. James Stephenson (2,268 comments) says:

    so I aren’t going to get VDSL (Chorus wont be able to afford to continue with more cabinets),

    The cabinets are there already, and have had VDSL2 capable blades in them for a couple of years. 2+ to VDSL2 is a switch-flick…except that it’s waay more sensitive to noise and interference than 2+. It doesn’t take many repeat “my internet’s too slow” call-outs to kill any profit for the lines company.

    What needs to happen is that the Commerce commission get a proper understanding of what it actually costs to run and maintain the copper, and this High Court case may just bring that about.

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  28. Tauhei Notts (1,688 comments) says:

    When I look at this Chorus carry on I try to remember the name of that politician who said;
    “The government that is big enough to give you everything you want will also be big enough to take away everything you’ve got.”
    I think it was an American.
    Anybody know?

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  29. gazzmaniac (2,306 comments) says:

    Thomas Jefferson.
    “A government big enough to give you everything you want, is a government big enough to take away everything that you have.”

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  30. cha (4,145 comments) says:

    More bogus shite gazz.

    http://www.monticello.org/site/jefferson/government-big-enough-to-give-you-everything-you-wantquotation

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  31. marcw (261 comments) says:

    I would be more comfortable with the Commerce Commission’s recommendation if ALL the decrease in the wholesale rate was passed onto to their consumers by the wholesale clients ie. Vodafone, Slingshot etc. However, at least one wholesaler has admitted that this will not be the case for them, and that some of the decrease in their copper price will be used in developing their own UFB roll out. This is doing exactly what they are accusing Chorus of doing – subsidising UFB with their existing copper market.

    Other wholesalers have indicated they will increase data caps for their customers on copper, and again, not pass on all the decrease in costs.

    If Chorus is not permitted to subsidise UFB according to the Commerce Commission ruling, then the other telecos must be similarly held to account.

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  32. OneTrack (3,384 comments) says:

    “The cabinets are there already, and have had VDSL2 capable blades in them for a couple of years.”

    Yep, but not in my area :-(.

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  33. muggins (3,832 comments) says:

    Back in early 2012 a number of sharebrokers were touting Chorus a buy at up to $3.20 with an anticipated value of $3.50.
    I bought at $3.32 with the expectation of a good dividend but then I got cold feet and sold at $3.50.
    One of my rare good decisions so far as shares are concerned.

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