Commission a bogeyman frightening off investors

16:00, Dec 09 2012

Investors need a break. The Commerce Commission, or Comcom (as it is known in smart circles) should be renamed Concom, the Consumer Commission, to better reflect its role as a consumer watchdog and competition legislator charged with keeping prices down.

What seems to be missing from its brief is to consider the vital role investors take in growing this country's economy.

Headlines about the commission's activities invariably focus on the big falls in share prices major companies - such as Telecom, Sky TV or Vector - suffer following one of its rulings. It is a major bogeyman in frightening both local and overseas investors from the sharemarket: although the commission could argue that this is not its problem.

Chorus shares plunged to record lows last week. This followed the commission's statement on, firstly, how much Chorus will be allowed to charge for phone lines (a more benevolent decision than expected); and secondly its draft proposal that will massively slash the price it can charge for broadband connections (far, far worse than anticipated).

The commission's draft ruling adds months of uncertainty to the share price, as the final decision isn't due till next June. This prompted brokers to slash their valuations, and recommendations. First NZ Capital cut its target price from $3.60 to $2.84, and recommendation to underperform; UBS' new 12-month target is $3.30 (down from $3.50), and Craig's Investment Partners cut their target from $3.40 to $3.19.

This is terrible news for the thousands of small investors who bought shares at up to $3.70 (they fell to $2.78 after the announcement) after it was separated from Telecom last year. They were encouraged to buy by preliminary reports that the company would offer consistent good returns as a result of the Government's billion-dollar initiative to deliver broadband services. Now that is in doubt.


It didn't look risky. Chorus had Government support to play a major role in delivering hi-tech communication services to households throughout the country. The commission is also giving the Government another headache - as if it didn't have enough on the business and economic front already - in putting at serious risk one of its biggest, costliest election policies on ultra-fast broadband. The prime minister has hinted the Government may have to intervene, saying that the commission's ruling "is very problematic . . . it substantially reduces the company's income and its broadband capacity".

Chorus said the combined effect of the decisions, if the broadband price cut was confirmed in June, would be to knock up to $160 million off its earnings, and force it to rethink its business model, capital structure and dividend policy.

The commission's announcement sparked the usual confusion and uncertainty, and reports of local and overseas investors quitting the stock. Moody's agency said it will review Chorus' credit rating as it would add considerable costs to its $2 billion debt; however rival Standard & Poor's said it wouldn't review it because it expected the final draft would be subject to "significant political" intervention.

Share investors in a wide range of companies, including airport, gas, electricity, telecommunications and dairying, groan at news the commission is investigating something.

It tends to mean bad news, a falling share price and many months of uncertainty, while commission staff embark on a seemingly endless series of draft determinations and related deliberations. That said, the commission is a great make-work scheme for lawyers. Battling its decisions is a major expense for targeted companies who pay handsome fees to internal legal staff and external barristers and other experts who specialise in the arcane world of competition law.

The commission does have a difficult job with worthy aims in trying to tackle companies that may be seeking to maximise their profitability at the expense of consumers.

The trouble for investors is that it delves into areas far too complex for most to understand. I have relatively little difficulty following, say, how Fletcher Building is doing, and whether to invest at present given the sharp rise in its share price, its potential earnings from Christchurch, against the fact that it is having a tough time in its biggest market, Australia (which makes me cautious).

But I haven't a clue what to do with a stock once the commission gets involved. It will spend untold hours studying highly technical stuff like whether the rate of return for an electricity lines company is reasonable based on how this company revalues its lines.

It is equally difficult to understand the methodology the commission uses to price telecom companies. Complicating matters further is that companies being investigated inevitably seek to defend themselves - as shareholders would want them to - further protracting any outcome. Once things are settled, a year or so later the commission is likely to be back for another round.

This means many quality Kiwi stocks that can be targeted by the commission carry what is called "regulatory risk", which is starting to frighten away offshore investors. Sky TV is an example. Its shares fell from $5.65 to $4.82 after the commission announced it was investigating its relationship with internet providers. It picked up to $5.22 after announcing a special 30c dividend. But it promptly lost ground again last week after the commission's tough preliminary finding on Chorus.