Broker suggests Chorus should walk away

TOM PULLAR-STRECKER
Last updated 10:47 29/11/2013

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Forsyth Barr says Chorus should consider reneging on its contract to roll out ultrafast broadband (UFB), even though it calculated the company could face $360 million in penalties.

Chorus shares have plunged 15 per cent to $1.51 in trading this morning.

Cancelling the UFB contract would also give the Crown the right, over the following six months, to step in and take control of the company, analyst Blair Galpin said.

However, he said successfully backing out of the contract could save Chorus $1 billion in capital expenditure and allow it to pay some dividends, which it might not otherwise be able to do.

Forsyth Barr today slashed its valuation of Chorus shares by more than 20 per cent in the wake of news the Government would not have the support of minor parties to set the price of copper broadband.

Although the Government began downplaying the likelihood of legislating the price of copper broadband several weeks ago, Galpin said confirmation there would be no law change could be "the final straw" for investors.

It means a $10.54 monthly cut to the wholesale price of a copper phone line and broadband connection, ordered by the Commerce Commission, is likely to take effect from December next year.

Forsyth Barr cut its "target price" for Chorus shares from $2.55 to $2.10 and changed its recommendation from "buy" to "hold".

The next 24 months for Chorus would be "dominated by uncertainty" while the commission carried out a "full price principle" review of copper broadband pricing demanded by Chorus, Galpin said.

The fact legislation was now off the table dramatically reduced the options available for the Government to provide "any meaningful support to Chorus", he said, adding:

"Withdrawing from UFB contract should be considered."

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