Crown Fibre Holdings has indicated it would be surprised if Chorus walked away from its contract to roll out ultrafast broadband (UFB).
Forsyth Barr analyst Blair Galpin said today that Chorus should consider withdrawing from the contract, even though the broker estimated the company could then be liable to pay the Crown an estimated $360 million in penalties.
Crown Fibre is overseeing the taxpayers' investment in the $3.5 billion infrastructure project, and its strategy director Rohan Macmahon said it had "no suggestion" Chorus was considering walking away from the contract, and Forsyth Barr's figure was "just speculation".
He would not comment on whether Crown Fibre had done its own sums on the possible penalties.
Chorus shares were down 15 per cent at $1.52 at noon, after falling as low as $1.47.
Chorus spokesman Ian Bonnar said it was "working through a number of options" and had ruled none of them out.
"We said . . . we need to look at our ability to remain a credible partner for rolling out UFB," Bonnar said.
"We are totally focussed on finding a solution that will allow us to remain in partnership with the Government for this important infrastructure build programme but it's fair to say that this is very challenging."
Cancelling the UFB contract would give Crown Fibre the right, over the following six months, to step in and take control of the company, Galpin said. Penalties under the contract were capped at $350m plus $50,000 a day for up to six months.
However, he said that if Chorus could successfully back out of the contract that could save Chorus $1 billion in capital expenditure and allow it to pay some dividends, which it might not otherwise be able to do.
Deutsche Bank analyst Arie Dekker said the UFB contract was "very onerous" but there were good reasons why Chorus signed it and he did not believe it could now withdraw.
"They basically don't have an ability to walk away because the damages are material and the Crown has the ability to step-in and take control," Dekker said.
"When you look at the consequences of what that would be, in combination with the damages, it would be quite value-destructive.
"If they don't build the UFB network, someone else will and [Chorus] will be left with a copper network with declining users. They are not walking away from this."
The options open to Chorus included reducing its dividends and/or raising equity in return for changes to the contract, he said.
"There are some real things they can get which I think would ease some of the burden," Dekker said.
"For example there is very little flexibility in the phasing of the build and there is little thought being given at the moment to a managed migration from copper to fibre."
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.
Chorus has said that would leave it unable to borrow the money it needed to complete the UFB contract.
Telecommunications Users Association chief executive Paul Brislen said the Government could help by guaranteeing Chorus' future borrowings.
Forsyth Barr cut its "target price" for Chorus shares from $2.55 to $2.10 and changed its recommendation from "buy" to "hold".
Galpin said 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.
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.
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