Chorus shares plumb new lows as uncertainty reigns over network operator’s future

Shares of Chorus [NZX: CNU] plumbed a new low in early trading as investors aired their disappointment over the government's response to regulated price cuts of the network operator's copper network.

The stock fell as much as 12 percent to $1.85, and recently traded at $1.94, after Communications Minister Amy Adams yesterday announced plans for an independent appraisal of Chorus's books. Since the Commerce Commission decision on Tuesday, the share price has plunged 26 percent, wiping $273.5 million from Chorus's market capitalisation.

"Investors are pretty disappointed with the response from government," said Grant Williamson, a director at Hamilton Hindin Greene in Christchurch. "Until there's some clarity, I'm not expected any major improvement in share price - there's a fair number of sellers wanting to exit, because most investors in Chorus were expecting very good dividend returns from the stock."

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

Chorus chief executive Mark Ratcliffe told Adams the company will work with government officials and an outside consultant "to resolve the unsatisfactory situation that has arisen."

Complicating matters further, telecommunications company CallPlus yesterday filed proceedings in the High Court in Wellington seeking a judicial review and declaratory judgment that the government's review of the Telecommunications Act (2001) doesn't actually comply with the law.

Adams ordered up the review as part of the government's response to the Commerce Commission's draft price cuts in December last year and has said the government was concerned that the economics of the fibre network Chorus is building could be undermined if the cuts were too steep.

In delivering his final decision this week, Gale ceded some ground so as to not underestimate the regulated price, which could deter investment in fibre. Still, he said his view on pricing was based on the commission's interpretation of the law as it currently stands, which set an initial price using international comparisons.

"If the government looks back, they'll realise they made a pretty fundamental mistake there, and this is not how they wanted it to go," Hamilton Hindin Greene's Williamson said.

Chorus has said it will take up its option to seek a full cost review, which would base the regulated price on the full economic cost of the wholesale service.

Legislation introduced in 2011 to enable Telecom to demerge its Chorus unit and free up the network operator to win the lion's share of a $1.35 billion subsidy to build the ultrafast broadband network required the regulator to make 'reasonable efforts' to complete its pricing determination by December 2012 to derive a cost model by December 2014.

Before the structural separation, regulated pricing for the UBA services were determined using Telecom's retail broadband service plans. After the split, a new cost-based model was deemed appropriate.

In a letter to Ms Adams, released to the NZX and ASX today (read it here), Mr Ratcliffe says the Telecommunications Act (most recently updated by National in 2010) is out of date.

The Chorus CEO writes:

The pricing principles in the Act are out of date. There have also been significant implementation and timing difficulties. All four UFB partners and the Government intended and have publicly noted that s18(2A) was a signpost to recognise the significant investment being made in fibre and to ensure copper price decisions didn’t undermine the UFB investment. However, the Commission – rightly or wrongly - does not have the same view.

Section 18 (2A) says "consideration must be given to the incentives to innovate that exist for, and the risks faced by, investors in new telecommunications services that involve significant capital investment."

(BusinessDesk)