Telecom split gets down to detail

17:00, May 30 2010

The proposal that the Government take a direct stake in Telecom's network arm Chorus is alive and well, after briefly being misdiagnosed with an acute case of "copper-poisoning".

Telecom chief executive Paul Reynolds was leaning towards a full demerger of Chorus when he briefed analysts on options for the possible breakup of Telecom on Thursday, the idea being that Telecom shareholders would be issued with shares in Chorus, which would become a separate listed company.

But the two options are not incompatible. The Government could take a stake in Chorus and the remaining shares could be distributed to Telecom shareholders. Indeed, that may be the best outcome. Nor is there a reason why Telecom shouldn't be allowed to retain a minority stake in Chorus under that or any other scenario. The more investors the merrier.

It makes no sense for the Government to set up a separate fibre company to partner with a demerged Chorus to lay fibre to three-quarters of New Zealand under its ultrafast broadband (UFB) investment initiative. After talking to Mr Reynolds following the investor briefing, it is clear that is not what he is suggesting.

"We see a demerged business, somewhat related to the existing Chorus, containing both copper and fibre into which the Government and Crown Fibre Holdings could invest on a nationwide basis and with which others could partner. The concept is you are building one national access business that has copper and fibre in it."

If the Government instead invested in a fibre company to partner with Chorus, Chorus would wither away as the fibre network was built until it became a residual business owning mostly copper-based network assets outside the area of the urban fibre build, while the newly created fibre company would grow from nothing to own and operate the network in the rest of New Zealand. That would be a very odd construct.


Telecom's thinking appears to be that the Government might get warrants or some other kind of special financial instrument that would entitle the Crown to a share of the proceeds from Chorus' fibre network, in return for the $1.35 billion it would allocate the company to build it.

But there would be nothing wrong with a direct shareholding.

It is vital from the Government's perspective that taxpayer money would stay within Chorus, completely "ring-fenced" for the fibre rollout.

But contrary to reports early last week, the Government is not ruling out partly "renationalising" Chorus on that condition.

Whether such a deal could be said to amount to Telecom "selling" a stake in Chorus to the Government, or the Government "buying into" Chorus' copper access network, are both moot points and red herrings.

Chorus would be migrating customers to fibre under the UFB scheme. To the extent the Government acquired a beneficial interest in Chorus's copper assets, it could reinvest any returns it got from that part of Chorus' business into upping its share in Chorus and accelerating the migration to fibre.

Whether or not the Government was a direct investor in Chorus, it would need to place contractual obligations on Chorus to build the fibre network to an agreed timetable. But if it was a shareholder, it could have the additional flexibility of being represented on Chorus' board.

The UFB initiative and the structural separation of Chorus are journeys into the unknown. The chances of success would be reduced if a demerged Chorus and the Government instead ended up dealing with one another at arm's length.

Investing in Telecom has been an unhappy experience in the past 10 years, and it is likely to be easier to attract private-sector investment into Chorus – and therefore into the fibre build – if investors are able to invest direct alongside the Government.

Having the fibre and copper assets in the same venture is vital to ensure the debate about how to manage the migration from copper to fibre is as rational as possible.

Mr Reynolds and Communications Minister Steven Joyce have said the migration could be achieved within 10 years, and that's fine. But there will be trade-offs, for example between how quickly to build the fibre network and how well to build it; how much of the network should be put in underground ducts, and how much should be strung up overhead on phone and power poles. It should be remembered that is a conversation the Government and industry have not yet had with the public.

The Dominion Post