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Tuanz wants multiple inquiries into Chorus' share surge Friday

The Telecommunications Users Association of New Zealand (Tuanz) says it will will write tomorrow to the New Zealand Stock Exchange (NZX), the Financial Markets Authority (FMA) and the State Services Commission (SSC) asking them to investigate unusual movements in the share price of Chorus.

On Friday, when a report by EY Australia into the financial viability of Chorus was received by the government but not released publicly, shares in Chorus jumped by over 7%, Tuanz says.

Tuanz is a member of the Coalition for Fair Internet Pricing, a group that has lobbied the government to uphold Commerce Commission-mandated cuts to Chorus pricing.

On social media, Coalition spokesman Matthew Hooton went futher than Tuanz, tweeting, that Friday's Chorus shareprice movement was the  "Most obvious example of prima facie #insidertrading you'll ever see."

Adams: better have evidence
ICT Minister Amy Adams reacted sharply to Tuanz' inquiry call.

"As a number of the claims made by Tuanz and the collation during this process have subsequently proven to not be correct, I'm not paying much attention to this one," the minister said late this afternoon.

"If Tuanz has evidence of wrong doing then they should present it and I would hope that they would have before making allegations of this sort."

Alternative explanations
However, there are other explanations for Friday's spike.

On Thursday, Brian Gaynor's influential Milford Asset Management began to load up Chorus, buying 9 million shares. The fund manager told NBR it had judged Chorus had reached a point of maximum uncertainty. Some investors could also have taken heart from ACC's Friday disclosure it had bought 500,000 shares.

Asked if Milford and ACC's vote of confidence could have been the factor behing Friday's surge, Mr Brislen told NBR, "It could well be. We're asking the question given the price movement before the report was released but little movement after."

Investors not seeing the upside
Worse, for Tuanz' insider trading theory, Chorus shares [NZX:CNU] were down 3.06% to $1.42 in late trading. 

If the EY report had an upside for Chorus, investors weren't seeing it.

The report has tough prescription for Chorus, recommending the company cut costs, take on more debt, and slash dividends to get its financial house in order following copper price cuts, and complete the UFB.

But it is still not clear how much of this advice Chorus will take onboard, or to what degree the government will lean on the company to follow EY's recommendations.

Tuanz says a similar trading pattern has been observed other times that Ms Adams has made major announcements, such as when she issued a Discussion Document on pricing for copper broadband and voice services in August.

Suspicious pattern
"Looking at the graphs, it seems when Ms Adams makes a market-sensitive announcement, shares in Chorus move significantly beforehand but not after," Tuanz CEO Brislen says..

"While Tuanz is not making any accusations against anyone, many hundreds of millions of dollars are at stake.  The strange price movements in Chorus shares over the last year merit investigation by the NZX and FMA in order to assure everyone that no insider trading has occurred.

"Given the strange price changes all seem connected with government announcements, it also makes sense for the SSC to investigate the matter, as it did over the leaks about MFAT restructuring.

"Assurances are needed that people who may be privy to forthcoming government announcements are neither trading on that information themselves nor providing it to third parties."

READ ALSO: Analyst looks past EY's tough prescription, upgrades Chorus to buy

Comments and questions
18

Well this has to take the cake - Everyone's favourite Chief Executive Of Himself Paul Brislen (acronym CEOH due to being TUANZs' only employee), fresh from expert capital raising advice for Chorus ('It would be easy to raise $500m (ie almost your entire market value) cause the economy is booming!"- a bit like "You can actually see Russia from land here in Alaska" for foreign policy expertise!) even though the Company with the current Comcom regulated price not meet its Return on Invested Capital and lose money (who wouldn't want a piece of that action!?), now has moved onto being an expert on insider trading.

The evidence " We're asking the question given the price movement before the report was released but little movement after", "Tuanz (ie CEOH) says a similar trading pattern has been observed other times that Ms Adams has made major announcements such as when she issued a Discussion Document on pricing for copper broadband and voice services in August", and finally the piece de resistance "Looking at the graphs, it seems when Ms Adams makes a market-sensitive announcement, shares in Chorus move significantly beforehand but not after,".

So let us check the veracity of these claims shall we? All the fun and games kicked off when the ComCom released the final UCLL decision and inital draft (or should that be daft) decision on UBA (ie a cut of some 60%) on the 03/12/12 pre market open. In the 3 days leading up the stock was flat, up $0.02, and up $0.06 respectively closing at $3.40. Not suprisingly the stock plummeted on the news, down 14.41% and continued in a downward pattern in the following days as investors diigested the news.

It was on the 8th of February before the market opened that Ms Adams announced the review of the regulatory framework. On that day the stock went up 10.14% or $0.29. So what happened in the 5 trading days previous to the announcement? no change, no change, up 3 cents, down 2 cents, no change. Gee, if there were some insider traders, boy they were cunning ones! Anyway this completely contradicts CEOH's claims of movement before but not after.

On to the August announcement (07th August) metioned earlier. On the 2nd of August Chorus announced a new $250m bank facility, quite positive when you consider their need to finance the UFB obligatiions. So on the 5 trading days before the announcement (31/07 - 06/08) Chorus was down $0.04, no change, up $0.07 (Day of debt announcement), up $0.05, and up $0.08. So up a net 5.78% over five days but hardly firecracker given volumes were light and there was a positve annoucement on the 2nd of August. Also just over a month before in late June Deutsche Craigs had put a sell on CNU pushing them down to all time lows. So they had been bouncing back from this sell off for a while. Ms Adams released the discussion document before the market open and the stock closed up 4.48% on 3-4x times normal volume. So they go up 4.48% AFTER the announcement. But CEOH says they only go up before and not after...hmmm...

Ok so onto the ComCom's annoucement of the final UBA decision (a drop from $21odd to $10.80 odd, over 50%) on 5/11/13 - understandably CNU drops like a stone, down 6.84% that day, and 5.51% the next. But investors were still hoping the Govt would intervene quickly. When Ms Adams annoucened premarket on the 7th rather than do that they would get an independent review, the market took this badly (having expected a postive response) and CNU fell another 9.29% that day and 4.76% the next. Painful for investors, but the price movement is perfectly understandable given the news. And funnily enough the market reacted AFTER the announcement But CEOH says.....

On the 18/11, CNU was off 5.24%, again explained by the pre-market announcement that CNU were withdrawing dividend guidance. The stock continued to drift down after that (as markets HATE uncertainty) until the 29th when of course the minor parties publically announced they were withdrawing any support for National to correct the horribly worded legislation that got us in the mess in the first place. Chorus fell 14.57% that day, and then another 5.57% the next. Ironically CNU got a ASX price enquiry that day for the price drop.

And the most galling thing of all is that the direct cause of it was CEOH and his Coalition of the "Increase my Margins 1st, might pass on to Joe Consumer 2nd" Mates. By winning the PR battle, getting the whole issue politicised, and thus making the minor (struglling) parties think there was some easy political capital (ie votes, who doesn't want cheaper stuff!!!) to be made, they effectively caused the fall in Chorus that day. So for CEOH to say "many hundreds of millions of dollars are at stake", yes Paul, you're right. Considering CNU was at $1.785 before the law change was off the table and its now $1.43, you've been instrumental in wiping $140.7m value off a company that is probably now +60% NZ owned and will be in large number of Kiwisaver funds, individual portfolios, and mum and dad managed fund holdings.

But I digress. And so we get to last Friday. Wow, up 7%! Hmm what happened before then? Funnily enough, there were two substantial shareholder notices from a fund selling down in the week before that. Who just happened to be the one whose manager called NZ as politcally risky as Pakistan. Sold 1.5m shares on the 5th and another 5.7m between then and the 9th to go below the 5% threshold in CNU - But still held 19m which he probably sold out of completely. So once he finished selling (at all time lows) the stock was always going to bounce, But since he would have sold quite a bit of that stock to Milford "liquidity (is) being provided by a large offshore seller at a discounted price" Mark Warminger, Milford Asset Management NZ Herald 12th December - and ACC chimed in taking 500k then the stock was always going to bounce STRONGLY once the selling pressure eased and it became well known who had done the buying (and Milford are as adept as anyone, yes even CEOH, at playing the media - ie get a position THEN let the market know about it).

So THAT's why the stock went up 7% on Friday - anyone with access to google finance website : www.google.com/finance (for historic prices and announcements) and common sense (an oxymoron if ever there was one, especially regarding the whole UCLL/UBA debacle) would be able to work it out.

One final thing, which is the vertible Elephant in the Room that the Coalition (and Telecom and CEOH and his former employer Big Red) will be well aware of but have been steadfastly ignoring, is the eventual FPP price for the UCLL & UBA. Given that the current price implies a replacement value for Chorus Network of around $2.8b and it will cost Chorus $3b+ just to roll out Fibre to 54% of the (higher population parts of the) country, what do you think the MEA (modern equivalent asset) that reaches 100% of the country would be worth? Even blind freddy could work out its going to be worth a lot more than the IPP implies (probably around $6-7B in my view). That depreciated and with a 6 odd% return will get us back to around $40 - $45 a month odd. And with that Telcom court case a few years back confirming retrospective pricing once its announced..... Hang in there Chorus shareholders, things should improve....Dont let CEOH and his mates get you down.

And for all those of you who believed Chrous shareholders were some how getting a massive monopolistic returns, raping and pillaging the country, well Chorus' annual dividend was only 14.5% of what it was spending on Capital expenditure - not huge is it? and its payout ratio of net profit was just over half, only 58% - and its return on average assets was only 7.8%. Hardly profit gouging. Its return on equity is 29.7%, but only due to having a relatively high level of debt compared to its equity. As its assets increase (Equity) and its earnings decline over time (until Fibre brings them back up) that return on equity will fall.

One thing to note is that the two companies who benefit the most from the ComCom's cuts due to their market share are Telecom who with probably 60% foreign ownerhship pay out 85% of their net profit, and CEOH's former employer wholely foreign owned Big Red (Vodafone) who pay out 100% of their profit. Ah the Irony.....

Incidentally the dividend yield in the EY report is artficially high - it was done on a share price on the 30th of June 2013 of $2.39, bascially $1 below where the price was before the comcom's "yeah NZ's network is about the same as one that a vertically integrated operator (think of a Swedish Telecom pre-split) uses to service Swedish multi dwelling apartments at an exchange rate that the $NZD as NEVER been that high". So at a "non-influenced by a dumb valuation model" price of $3.40 the yield is actually 7.5% - Again, not excessive.

Sorry, got a little off track there : to end, rest your beating heart Paul, no wolf of wall street manipulation here....

(actually just realised "wolf of wall street" = crying wolf! how appropriate)

29% return on equity for a monopoly is excessive given the risk free rate is around 5 or 6%.

Hence in my view Com Coms intervention.

Also Milford and ACC obviously believe Chorus will meet its cost of capital otherwise they would not be buying shares. It is irrelevant where the price was investors need to decide if the current price is a buy or sell.

Suggest you go and look at Fisher & paykel appliances written off by nz investors but issues fixed and provided haier a good return. I am sure that $500m could be raised at the right price.

Anon - ROE is irrelevant when pricing the network. It is the Return on Capital. Corporate structure has a material impact on ROE thus making your argument null & void. #doyourhomeworkanon

Return on equity has nothing to do with getting a monopoly getting an 'excessive' return - its merely a factor of the individual company's balance sheet . Ok investing 101. Company A (lines company) earns $50m on $833m of assets = 6% - not excessive is it?

If it has no debt its return on equity is 6% (ie all the $833m of assets is equity). But lets look how its return on equity changes as its debt goes up. $300m of debt -> $50m earned on $833m assets less $300m debt - now the return on equity is $50m divided by $533m (equity what is left over when assets are reduced by the liabilities) = 9.38%. $500m Debt - $50m/($833m-$500m) = return on Equity = 15%. And with $660m debt? = $50m / ($833m - $660m) = 29%. Now there many other things to consider (ie the higher debt would mean higher interest reducing earnings etc.

But the point is in all the examples above the company's return on its monopolistic assets remains at the reasonable 6% (ie $50m on $833m Assets) - so Joe Public is not getting no matter what the underlying companies debt ratio is. Thus its the RETURN ON ASSETS that is the key. And for Chorus its 7.8% (and reducing as they add to it via the capex spent on Fibre).

Hardly screwing us are they?

Valid point on RoA but I would suggest calculating RoA including fibre assets which are basically not producing is wrong or not necessarily comparable. What is the RoA on the copper has to be a lot higher than 7.8% which is excessive for a monopoly asset. Hence the changes.

In addition given the high leverage then the share price is highly volatile to small changes.

Shareholders obviouly backed a highly speculative share and have lost. But this is risk and return.

TUANZ has also previously stated a preference for a cost-building block pricing approach to UBA, because: “It reflects the actual costs structures rather than the theoretical ones implicit in modelling methodologies. Further, it takes account real costs incurred in New Zealand, rather than the costs in other countries which are the foundation of benchmarking."

Do you stand by this Paul?

I think a lot of the problems we see come about because our regulations are based in large part on theoretical cost models based on benchmarking or other similar economic models instead of the actual costs involved in providing the service.

If you go back to the launch of the Telecommunications Service Obligation (TSO) Telecom was required to offer a service of 14.4kbit/s to 95% of the population and a further 9kbit/s to the remainder.

That's the kind of service you get from a GSM cellphone, but the cost model applied was that of a copper line network. Oddly, it turned out to be very expensive to provide the service on paper, while in the real world it should have been incredibly cheap.

That kind of approach is the international standard and so we follow along, but I can't help think there must be a better way.

I don't have an answer to the question of what would be a better way but aside from keeping the economists of the world employed, the current system leads us down a rabbit hole.

However, those are the rules of the game so those are the rules we have to play by and changing the rules halfway through the game is not appropriate. There are many aspects of the Telco Act I would change but they are the rules in place so we should follow them.

So you're answer is "the legislation is a joke, but we'd better not change it." If the benchmark had suggested a higher price would this still be your position? Be honest...

No, my answer is "the legislation has problems but those are the rules we agreed to before the game started so those are the rules we'll play by".

We're two or three years in to the UFB deployment and it will last for another seven. This is not the time to change the rules. That time was before the UFB began and we'll revisit it when the deployment is complete (at least, that's what was supposed to happen but we've changed that now as well).

The worst scenario is that having pitched for business under one regime we then change it without any visible gain and with plenty of downside at the first sign of trouble.

I would love to hear your thoughts now then on L&G's "power policy" they decided to cynically throw out to NZ - completely uncosted and unverifiable - on the very eve of the MOM IPO with MRP and the rest...

You're now in bed with some of the same economic vandals that cynically wiped hundreds of millions of collective wealth from Individuals, Iwi, Corporations and NZ super funds.

Please tell us about your thoughts on L&G's fiscal vandalism with that example?

Please remind me why the good members of TUANZ are funding you to pursue insider-trading claims Paul? How exactly is this in the interests of telecommunications users?

Because you’re coming across as completely hysterical and intent on doing and saying anything that might smear the government…

Great question; did the 300 TUANZ members vote to join Coalition for Fair Internet Pricing or is it just a horse that Paul is riding on his own?

Have Labour promised you a role in communications, when you stand for the coalition for Industry destruction ticket in next years general elections?

Paul Brislen reminds me of the person"who wants to go to heaven but doesn't want to die," Chorus surely built their business case to install UFB based on cash flow from existing activities plus Govt support . If ComCom take away the cash flow from the income from existing activity ie copper lines. then they are obviously going to have a problem. If Brislen's group want UFB then someone has to pay for it. They obviously don't wan't to. A fair increase in copper would be the best way to provide for UFB for those who need it.

The Commerce Commission isn't "taking away" anything from Chorus. The move to regulate UBA prices was introduced before Chorus was spun off from Telecom.

It knew about the rate reduction before it was a separate company.

If we give Chorus an extra $400m or more we won't get a better UFB. We won't get it built any faster, it won't be any larger.

It will be exactly the UFB they have already agreed to build but instead of it costing us $900m it will have cost $1.3bn.

If we have an extra $400m to spend on broadband I'd rather see it spent on rural broadband connectivity or international connectivity rather than simply giving it to a privately owned company to give to its shareholders.

So that's what it's all about. Once again Paul Brislen shows his disdain for shareholders, forgetting that they are the equity providers and are entitled to a return on their capital for the risk involved. Mr Brislen is absorbed in self-interest and seems to be doing all he can to cook up a storm, and totally wrongly as has been pointed out above.

Shareholders are not guaranteed a return. Businesses fail all the time. That is the risk. Given the high operating leverage of this business then it was high risk. Most business do not expect or get government bail outs. Unlesa of course you are the Americas Cup or a film company. .......or aluminum smelter, fonterra..... maybe everyone should be asking for a state handout.

But ComCom has determined what they consider a fair price. This is not what Paul and others argued for they basically insisted that the government does not override the market which includes the regulator. I think foremost we do not want the government to interfere. The ComCom in this case is effectively part of the judiciary who has to be independent.