SMELLIE SNIFFS THE BREEZE: Worst over for Telecom?

SMELLIE SNIFFS THE BREEZE: Is the worst over for Telecom?

By Pattrick Smellie

Aug. 4 (BusinessDesk) - Here's a heretical thought: the great dog of the New Zealand sharemarket, Telecom, may just about be ready to sit up and bark again.

Having plumbed depths that took the share price to a historic low point in June of $1.78, sparking talk of break-up if it ever sank as low as $1.30, the stock has quietly picked up nearly 10% in value over the past month, trading today at $2.01.

Hardly stellar and still almost 29% down on the last year, but evidence perhaps that it has stepped back from the brink in the last few weeks.

Of course, the world has still changed for Telecom, as it has for telcos everywhere, and there's plenty of change still to come.

But its announcement on Monday of the terms of its involvement in the government's ultra-fast broadband initiative look not only realistic, but form the bones of a deal that a government looking for a rational outcome for a flagship policy would be mad not to embrace.

Those with a strong stomach, an eye to the future, and a calculated view that Telecom has been talked down so far that it's starting to look like up, are also starting to think it's time to buy.

"On UFB, even if Telecom isn't going to be in the tent, it's priced for them to be in the tent," says one of the country's shrewdest fund managers, who sees upside from here, even while acknowledging just how many imponderables remain about the future profitability of a structurally separated, two-part Telecom.

Telecom CEO Paul Reynolds acknowledged this in his benchmark Sydney investor presentation back in May, when he floated the demerger option that he finally confirmed this week.

"Which will be the more successful of those two companies?" he said of a future in which Telecom separated into fibre-owning Chorus and a service-providing Telecom. "Who knows?"

However, by lodging its revised bid with Crown Fibre Holdings with the demerger offer included, Telecom is starting to make it almost impossible for it not to be involved and for the company's other great prize - regulatory relief - to be delivered.

Exactly what that relief will look like remains to be seen. Not everything in the Telecommunications Service Obligations that Telecom objects to is relevant to UFB, but Telecom argues with some justification that many of these regulations don't achieve much for consumers, while stifling the prospects of the country's largest listed company.

In other words, their impact is arguably punitive without purpose. If it starts playing nice, the theory goes, perhaps there will be an end to successive governments seeking to destroy shareholder value for political gain.

If that logic is even half-way accepted, then a deal is there to be struck with the government to ensure that Telecom is inside the UFB tent; that there is only one national fibre network; and that the already shaky economics of the UFB plan are not sunk by an aggressive incumbent undercutting the new fibre network.

That's the outcome that the Australian government is achieving with its National Broadband Network initiative, which not only includes the biggest operator, Telstra, but recognises the power of its huge customer base in improving the likelihood of early fibre services uptake - the key to the economic success of any UFB roll-out.

If Telecom were excluded here, it would use its own already extensive fibre network and the fact that it can deliver broadband at high speed and low cost over copper wire for some years to come to undercut the new fibre network. In that world, the prospect of mutually assured self-destruction is more likely an outcome than the great leap forward in national productivity envisaged by Prime Minister John Key and Communications Minister Steven Joyce.

There's nothing to say that the government won't still involve other partners in the fibre roll-out. For example, the New Zealand Regional Fibre Group has a credible proposal, and the political glow of local community ownership. Backed by local monopoly electricity and gas networks, it arguably also has plenty of lazy balance sheet capacity to fund potentially low-return fibre network infrastructure.

Either way, the result is a new national fibre network that operates as a monopoly, with its rates of return and investment plans overseen by the competition authorities, so that actual competition can occur in the services the fibre grid enables.

It's here, in the negotiations about just how much money a separated Chorus would be allowed to make from its involvement in a single national fibre network, that some of the hardest parts of the trade-off for regulatory relief will occur.

Consumers who might otherwise have enjoyed two fibre networks racing to the bottom on price will be counting on the government not to blink when it comes to that part of the deal.

(BusinessDesk)

© Scoop Media