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Chorus latest: Adams expects EY review taster this week

Dec 3: After three days of spectacular falls - part of a dive that has seen the company halve in value since August - Chorus shares stabilised today.

In mid-morning trading, shares [NZX: CNU] was up 2.78% to $1.48.

Late yesterday, Prime Minister John Key hinted the government might renegotiate Chorus' UFB contract.

Telecommunications lawyer Michael Wigley told NBR that while the government needed to change the law to over-ride the Commerce Commission's determination to cut Chorus' copper line pricing by 23%, Chorus' UFB contract could be altered without recourse to legislation.

This morning, ICT Minister Amy Adams said EY Australia's independent review would report next Thursday (Dec 12), but added "we’re hoping to have an early indication of where that will go perhaps later this week." 

Ms Adams says the intial briefing from EY will be a draft - and perhaps an oral rather than written report. The final report is due by year's end. The government has not set a timetable for its response.

The Prime Mininster said that if the review found Chorus could not complete the UFB rollout "under its own scheme" after the Commerce Commission-mandated 23% cut to its copper line pricing, then Crown Fibre Holdings could potentially renegotiate its contract with Chorus.

Ms Adams elaborated later in the morning at stand-up media briefing, "What I’ve been clear about all the way through is that the first step is that we expect Chorus to consider what they can do to meet their obligations – they have a legal contract and the first step is for them to address it. If there is a risk to the roll out of Ultra-Fast Broadband, that’s something we don’t want New Zealand to miss out on, so if Chorus are unable to meet it under their own steam then the next step would be for Crown Fibre Holding to meet with Chorus and see whether contract changes could be negotiated which could help that."

The PM has ruled out extending the UFB rollout, but other "soft bailout" options include giving Chorus more time to pay back money loaned by the government (half of the $929 million being invested by the Crown is in the form of interest-free debt securities), or lending Chorus more money on soft terms.

Yesterday also saw Chorus take two measures that could help it if not avoid, then at least delay the price cut pain.

Yesterday afternoon also saw the company file a High Court appeal against the Commerce Commission's price-cut ruling, and exercise its right for a final pricing principles (FPP review).

Forsyth Barr analyst Blair Galpin notes the FPP process could take up to two years, by a Commerce Commission estimate. Previous Hight Court cases involving telecommunciations sector regulatory issues have lastes years - and in the 0867 case a full decade.

Friday, Mr Galpin recategorised Chorus from medium risk to high risk, and cut the company from buy to hold. As things stand today, the ForBarr analysts expects dividends to be canceled for the next two years.


Dec 2: Chorus shares [NZX: CNU] were down 7.54% to a new all-time low of 1.41 in midday trading.

The latest fall comes at a time of increased uncertainty for investors. Analyst are united in downgrading Chorus, but split on whether the costs and penalties involved would make it worth walking away from the UFB.

And lawyer Michael Wigley - a telecommunications sector specialist - says Chorus abandoning the project would be very difficult from a legal standpoint, while Chorus "being allowed to throw in the towel" would imperil future public-private partnerships, and possibly violate NZ's free trade agreements.

In any case, the refusal of government allies ACT, UnitedFuture and the Maori Party to support legislation to overturn Commerce Commission-mandated price cuts indicates National would have a difficult time gaining support for a Chorus bail-out measure.

The company's shares have fallen each session since Thursday, when minor parties went pubic with their refusal to support a law change.

Thursday, shares dipped 2.5%, Friday they closed down 15%. The company has now more than halved in value. to a market cap of $558 million, since the latest regulatory controversy hit in August.

This morning on TVNZ's Breakfast, Prime Minister John Key said the UFB would go ahead, and finish by its original target date of 2020. The government is waiting on EY Australia's independent review, due mid December, before deciding on its next steps.

The PM said, "We were never going to use legislation because we knew right from the get go people wouldn't vote for that."

A member of the Coalition for Fair Internet Pricing was quick to point out that all three proposals outlined in a discussion document released by ICT Minister Amy Adams in August involved legislative changes.

Chorus shares in freefall

Investors have reacted sharply to yesterday's poltical developments. ACT and UnitedFuture said they would not support legislation to over-ride the Commerce Commission's October 31 determination to slash Chorus pricing - blocking the government's presumed path to assist the company.

Shares [NZX:CNU] closed down 2.5% yesterday to a new low of $1.78.

In early trading today they were down nearly 16% to a fesh all time low of $1.50.

In August, before the latest regulatory controversy broke, Chorus was trading above $3.

This morning say Forsyth Barr - hitherto one of Chorus' few remaining boosters - downgrade the company from "buy" to "hold", and recatergorise it from "medium risk" to "high risk".

Analyst Blair Galpin sees dividends - 24 cents per share or $95 million last year - cancelled for the next two years.

ForBarr has even gone as far as running the numbers on a Chorus withdrawal from the multi-billion dollar UltrafastBroadband (UFB) rollout.

The government has hired Ernst & Young Australia to run the ruler over Chorus's books to see if it has the financial capability to deal with a Commerce Commission imposed cut to services on the copper lines.

Waiting for EY
Communications Minister Amy Adams is mulling how to respond to Telecommunications Commissioner Stephen Gale's planned 23 percent price cut for access to Chorus's regulated copper lines, which the network company says will force an overhaul of its capital structure and may threaten the taxpayer subsidised build of national fibre cable infrastructure.

Ms Adams said yesterday the stance by other political parties wasn't unexpected, and that the government has been considering a number of non-legislative measures for some time.

She told Radio New Zealand's Checkpoint programme legislating would have been the government's least preferred option, and that the government is waiting to see EY's analysis to determine what slack Chorus can pick-up, before deciding what steps to take next.

Other options open to the government are changing the terms of Chorus's contract to build the UFB network, which could include shifting the milestones the company would have to meet.

Chorus chief executive Mark Ratcliffe told RNZ's Morning Report programme there were "many, many options" still available, including the ability to vary the company's contract with the Crown for the UFB rollout.

The UFB project was a public-private partnership, making the Crown a "critical" element in whatever approach was determined, Mr Ratcliffe.

Comments and questions

I tip that the Government will likely alter the delivery dates for Chorus and maybe the network specs. This will be lose-lose for both Chorus and consumers. Chorus will survive, although it will be singing the blues for a while instead of a harmony.

When an analyst values Chorus at $2.10, do they mean in total, or per share?


Good question. Probably the latter. The governing legislation is very poor and is inconsistent with the foremost principles of competition regulation. In order to effectively eliminate price gouging, the imposition of price controls on a business with substantial market power must have the effect of limiting returns to the level of return that could be expected in a fully competitive market. In order to assess this competently, an asset base (copper network value in this case) must be determined, along with an efficient cost base and an appropriate cost of capital. However the legislation requires that the Comcom ignore this approach & look to international analogues to determine pricing. The Comcom (in its all too familiar anti-investor style) then goes on to arbitrarily select a tiny sample of spuriously analogous countries and voila - a total debacle. The public and vote-seeking moronically Pavlovian politicians welcome the comcom's determination. But it is nothing more than a Chavez-style (mis)appropriation, nationalisation, sequestration - take your pick. Appalling. Chorus however does look very silly not to have nailed this down before committing to the newly disastrous rollout of UFB. Incompetence simply abounds.

How on earth can you determine the asset base value other than by working backwards from the inconme it generates? Replacement value or original cost is irrelevant when technological change can render it obsolete overnight and it has no alternative uses.

Good points but if you think about generating a regulatory value from its earnings then the circularity of rising tariffs & regulated asset values soon becomes apparent. This is why regulatory regimes globally shy away from such an approach. You mention obsolescence, also a relevant point. This of course suggests that there is no need for regulation. Actually from the perspective of UFB network economics you could mount a strong argument for imposing a minimum ( not maximum) price on copper. Much longer argument that one though!

That circularity was my point of course. There would be no need for regulation had the Govt ensured competition between the two technologies rather than monopolistic ownership of both.

Incompetence at both the management AND governance level?

With this and the SOE share debacle it just shows you would be mad to invest in building infrastructure in this country.

You must have your tongue firmly in your cheek, Fortunes continue to be made from infrastructure investment in NZ. In fact the environment is so benign that steps had to be taken to keep the Canadians out of Auckland Airport; remember?

Indeed. In fact it looks as though the country has scored itself an own goal in that regard. While there may be many who are delighted at the outcome of what has happened to Chorus, MRP and the others, or those who simply couldn't give a toss as they storm the streets with the rest of the mob, me thinks they are forgetting one small little thing. The law of unintended consequences. At times I really do think we live in Lilliput.

We are muppets on the global stage of world business. We are so isolated from the rest of the world we have forgotten it takes investment to get ahead. And people don't give money for free.

Do you think our glorious leader regrets his "chorus could go broke? comment; seems to have backfired ....

The market seems to be agreeing with him though.

Yes, but the point is that he was using it to support the proposition that the government would need to override the ComCom, and make the Gnats look good. Now, however, Johnny No Mates has to...?

It was only a matter of time before this government was given a bloody nose by the market, as did the previous Labour govt.. They have shown every intention to be interventionist whenever it serves their political purposes.

I thought 'free' marketeers like Key and English would have know better. Well welcome again to reality boys ... learn your lesson well and start cleaning out the stables.

In all of this mess do not forget the CallPlus legal challenge to the Minister. This proceeding is on the basis that the Minister has not included in her thinking, documents issued, or consultation, all of the matters to which she is bound. This partly picks up Simon Botherways" point about complexity and robust regulation rather than arbitrary deal making on the run.

Chorus have messed up big time. They should have had all of this nailed down before they entered into the contract. They have been complacent and assumed the government would allow them to exploit their monopoly position - exactly the same mistake Telecom made.

Given that all of Chorus management were at Telecom their attitudes and behaviour should come as no surprise.

Their choices include attempting to get out of the contract and paying a huge penalty or raising more capital (presumably by deeply discounted rights issue) so they can deliver their side of the contract.

Or they could go bust and someone else could pick up what would then be a viable contract.

Added to its copper woes, the problem is Chorus ignorantly under estimated the cost of the UFB build & remains too arrogant to look at technology outside its old key suppliers. They could easily reduce the UFB cost by 30% if they take their head out of the sand.

they could start by getting rid of the 10 to 12 fellows standing round for the last 2 days installing the fiber

It is already too late for NZ. Internatonal investors are quite clear in their signals that it is just too risky to invest in regulated firms in New Zealand any more. The government is not a trustworthy partner for a PPP, and politics has too great an effect on regulated firms to make it worth the risk. Just watch the funds flow to countries with much more stable regulatory regimes - e,g. Malaysia, and some of the African states, which ironically now look to be much safer bets than NZ.

The risk at the moment is the transition from a lightly regulated environment into one more heavily regulated - more in line with many more mature markets.

This should be a one-off event, once this is settled in then international investors and others will be able to invest with perhaps even greater confidence - less risk of increased regulations.

It might be a different group of investors but there will still be investors. The fact of the matter is Chorus is now worth half what it was, maybe it is now being priced correctly for the new regieme. also for every seller there is a buyer.

Rubbish! Structural separation is the most rigorous form of access regulation in the OECD. Only two OECD countries - Australia and New Zealand - have mandated it as part of their regulatory regimes. The UFB is in fact more lightly regulated than the copper network, as it relies on contractual undertakings and not legislated provisions.

Still not sure, I thought seperation had occured in markets like the UK. Regulated markets occur all around the world in different sectors etc.

I see that a group of international investors are looking at doing transmission gully in wellington. Obvioulsy they were put off only for a few minutes.

International and local investors will re-assess what they will and will not invest in, but they will not walk away from NZ, at some point the price becomes attractive given the risk. i am sure there are some international investors buying Chorus now.

UK separation is functional only and was voluntary not imposed by statute. No other OECD country apart from Australia and NZ has embraced legislated structural separation. Indeed, most European countries have rejected separation (in any form) as overly-intrusive and quite inconsistent with the development of the 'ladder of investment' (that is generally invoked as the motivation for local loop unbundling - adopted in NZ in 2006) and future infrastructure competition (e.g. copper competing with fibre). The reason is that unbundling entrants have no reason to invest in climbing the ladder if, upon building their own fibre network they have to give up all the customers they fought hard to win off the incumbent in the first place. As the 2006 legislation was predicated on increasing investment in the sector (primarily by entrants) then it seems somewhat perverse to structure a PPP only 2 years later that constructively prohibits them from participating and risks stranding their copper investments as fibre takes over.

The difference with Transmission Gully is that the government, and not the PPP partner, will own the infrastructure and bears the risks of factors such as demand variation that are influenced by other government or regulatory decisions (e.g. changes to petrol taxes affecting road use and hence maintenance costs. collision risks and/or toll revenues). The Chorus PPP was poorly structured as it left the private partner exposed to a whole raft of regulatory risks that no rational private partner in a roading PPP would ever contemplate bearing.

The crazy NZ arrangements occurred in large part because the Chorus PPP is a (developed) world first for a nationwide fibre access network (so limited experience in the sector) and the tender process was carried out with minimal input from the Treasury unit overseeing roading, schools and prison PPPs (so relevant local knowledge was bypassed). It also occurred in isolation from significant input from the competition policy people in MBIE who might have been able to advise on the implications for end consumers (and not just the retailers buying wholesale products, which are the bailiwick of the Commerce Commission and Crown Fibre). Caveat emptor (or is that caveat vendor).

Did Chorus not learn anything from their past as Telecom. Single lesson - you fight the govt, you lose. Telecom destroyed billions by fighting, Chorus is doing the same. Morons

A consortium of businesses, including UFB and content providers backed by foreign capital, will offer Chorus shareholders $3.00 per share and complete the UFB rollout by 2018. Structured not to exceed the 10% threshold for a single shareholder, the consortium will include world class project managers and content rights holders.

Sounds interesting... Wishful thinking or do you have inside information?

Yes. Interesting. At $3.00 per share that would still be a bargain being as Chorus fixed network assets alone are valued at $2.8 billion according to their annual report, which would mean just to pay fair value for those assets a takeover offer would have to pay about $7 per share. I guess that won't be happening soon.

Ahahahah nice one. Good Tui ad... Actually I think Kim, Drury and Julie Christie will reignite the international fibre project, link it locally, takeout XTRA/Yahoo (because they are of equal competence as their hardware mates at Chorus), do a deal with the US studio's, the government will sell them TVNZ and we'll all be happy...

Yes, interesting. $3.00 per share would be a bargain considering the fixed network assets alone are valued at $2.8 billion according to the latest annual report. A fair price just to pay for those assets alone would place the share price at around $7. I guess that won't be happening any time soon.