Options for Telecom

In light of the Government’s to the home proposal, there seem to be three distinct paths forward for . They are:

If is sold off, then Chorus would be in a very strong position to effectively gain most of the $1.5 billion on offer, by partnering with the Government to set up many of the regional fibre companies – or even one national fibre company.

The likely sucess in gaining most of the $1.5 billion would increase the value Telecom would get by selling Chorus. Also Telecom might not have to sell all its shareholding in Chorus – it could, I beleive, still retain a minority stake as an investment.

This would leave Telecom with its wholesale and retail arms. They would probably immediately have most of the current obligations imposed on them, such as equivalence, dropped.

With much reduced capital expenditure needs, and a cash inflow from the sale, Telecom should be in a position to increase the dividends it pays.

The downside will the inability to leverage the advantages of also owning the existing infrastructure. They’ll be paying an outside company to utilise their lines – the same as everyone currently has to do to Telecom. They will also be more at the whim of the market. If they lose market share to competitors, they won’t have the compensation of the fact the competitors are still paying them access fees.

Infrastructure companies tend to be safer, but have lower dividend returns. Competitive companies are a more risky investment, but can produce higher returns.

Participate as a minority partner

If Telecom do not structurally separate, then they are deemed a “partner” that owns a retail operation. This does not preclude them in any way from full participation in one or more local fibre companies (or even to still propose they be a partner in a national fibre company).

The key restriction is that will not have the right to appoint a majority of Directors to the Board of the LFC, and the Chair of the LFC Board must be agreed unanimously by all shareholders.

I’m not sure how important control of the Board of an LFC will be to Telecom. The initial partnership agreement with CFH setting out terms of investment and how extensive a fibre build will be is arguably the more important factor.

It is quite possible Telecom could decide to participate and invest in one or more LFCs. This will also help protect their investment in current legacy assets.

Do not participate

The third option is for Telecom not to bid to be a partner for any LFCs, or they do bid and are unsuccessful.

If this is the path chosen, then Telecom will be in a fairly strong position to ask for some of the current requirements imposed by to be removed. There would be issues over timing, of course.

It is likely Telecom would not undertake any more major infrastructure investment (such as further cabinetisation or further upgrades to VDSL2) beyond their current commitment of $1.4 billion. This would save them money in the short term, and in the long term they would become a customer of the LFCs for their higher speed products.

Telecom could do quite well relieved of the need to keep rolling out faster and nearer infrastructure. For many of their customers, the current speeds will be adequate for some time.

It is possible that they might keep up an aggressive investment programme to try and compete with the local fibre companies, and even drive them out of business. That would be a very ballsy call though, considering the firm policy of both major political parties is that the future fibre infrastructure must be open access and not part of a vertically integrated monopoly.

Telecom’s decision is going to be one of those really big ones – on much the same scale as which mobile phone technology to go with. The wrong call can cost a lot of money. The senior staff and board have an unenviable task looking at their company, considering its strengths and weaknesses, and deciding on the best path forward.

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