Telecom NZ considering splitting

Following a series of hints, Telecom NZ formally announced yesterday what had long been common knowledge: it is considering splitting its retail and network operations.
Previously Telecom has argued against separation and complained about the regulatory burden of its government imposed structural separation. However yesterday the company confirmed it is willing to fully separate its parts, if that’s the price of taking part in the New Zealand  Government’s $1.5 billion ultrafast broadband program.

In a media statement Telecom NZ CEO Paul Reynolds said: “Telecom’s strong preference is to align the interests of its equity and debt holders with those of the Government and New Zealanders. The Government’s UFB initiative will fundamentally reshape the structure of the entire telecommunications industry in New Zealand and Telecom is therefore undertaking a thorough assessment of the merits of structural separation”.

Reynolds’ unambiguous declaration yesterday didn’t come as a complete surprise. In April Reynolds said his company was “open to working with the government on a wide range of approaches to its UFB initiative.” When asked if this included structural separation, he simply repeated “a full range of approaches.”

Telecom NZ also made a case for the regulatory burden to be eased. Reynolds said: “Telecom is required by legislation to deliver significant system and technology projects envisaged for a pre-fibre world. A large proportion of these projects must be deployed this year, so it seems sensible at this time to reassess these projects to avoid significant congestion and waste.”

The company has proposed three specific changes. First, it wants to suspend the forced bulk move of its existing broadband customers onto a new copperbased service. Second it would like the government to drop the requirement to move 17,000 customers onto a new VoIP over copper service by the end of this year. Last, it doesn’t want to build new wholesale systems not consistent with the UFB-era industry structure.

POLITICAL REACTION: Communications minister Steven Joyce issued a statement saying he regarded Telecom NZ’s announcement as positive. He said: “A potential structural separation of Telecom would involve a number of complex regulatory issues to work through. I am encouraging Telecom to work with Crown Fibre Holdings (CFH) and the Ministry of Economic Development.” Joyce said the CFH process allowed potential partners to raise relevant regulatory issues and Telecom wasn't the only company to have done so.

On the other side of politics, the Labour opposition communications spokesperson Clare Curran was less impressed. She said: “The government needs to reveal whether parallel discussions have been held with Telecom about structural separation while a closed tender process is underway to roll out ultrafast broadband to 75% of New Zealanders.”

Curran said the government should not bail out a troubled telco or deliver profit to shareholders –
especially if they are not New Zealand-based. During the day the company’s share price reached NZ$1.92 – an all-time low. The shares ended the day down 1.5% at NZ$1.96 while the overall NZX 50 Index rose 0.4%.

S&P GOES NEGATIVE: While Standard & Poor’s confirmed its ‘A’ long-term and ‘A-1’ short-term corporate credit ratings on Telecom NZ. The ratings agency revised its long-term rating on TCNZ to negative, from stable.
In a statement Standard & Poor's credit analyst Paul Draffin said: “We consider TCNZ's vertically integrated business model to be a key driver of the group's strong business risk profile. Accordingly, any separation of the fixed-line access network will have a material negative impact on TCNZ's business risk profile.”
The statement went on to say: “A lowering of the long- and short-term ratings on TCNZ could occur in the next 12-to-18 months if:
• TCNZ agrees to structurally separate it copper access network from the rest of the group;
• The group's financial profile deteriorates, including fully adjusted debt to EBITDA increasing to
more than 2x on a sustained basis; or
• There is a significant shift in earnings mix to lower-quality earnings sources, such as information technology services.”