Chorus to shoulder most debt

UPDATED 2.45pm: Ratings agency Moody's says if the merger proceeds as planned, Telecom will likely be rated A3, with stable outlook, and Chorus will likely be assigned a preliminary credit rating of Baa2.

Moody's says, "New Chorus will likely have an investment grade rating profile, considering its stable network infrastructure business, which has utility-like credit fundamentals."

Telecom shares [NZX:TEL] were down 4.14% to $2.525 in late trading.

UPDATED 1.30pm: Standard and Poor’s (S&P) Ratings Services says it expects to lower the ratings on Telecom by one notch to 'A-/A-2' from 'A/A-1' if the demerger proceeds as planned.

S&P has also assigned a preliminary long-term issuer credit rating of 'BBB' to Chorus with a stable rating outlook.

This is based on S&P’s view that Chorus has "strong market position, high capital barriers to competition, and strong operating cash flow."

Telecom has this morning dribbled further details of its pending split into two separately listed companies.

Investors did not seem immediately impressed. Telecom shares [NZX:TEL] were down 4.36% to $2.52 in early trading.

Forsyth Barr's Guy Hallwright told NBR he was not surprised by the Chorus-heavy debt split.

But "[There is] less ebitda/ebit in New Chorus than I expected, more in New Telecom," - which Mr Hallwright though was probably the cause of Telecom's share price weakness today. "Markets may think New Telecom earnings will be priced on a lower multiple than New Chorus."

The key piece of new information released this morning is the debt split between the spun-off Chorus (or "New Chorus") and the remainder of the company ("New Telecom").

Heavier debtload for New Chorus
If the demerger goes ahead, New Chorus is expected to have approximately $1.7 billion of net interest-bearing debt (inclusive of associated derivatives) and New Telecom  approximately $750 million to $950 million of net interest bearing debt (inclusive of associated derivatives), the company said in a statement this morning.

The New Chorus debt presumably does not include the $929 million in taxpayer funds earmarked for the company under the government's $1.35 billion ultrafast broadband (UFB) project - 50% of which will be in non-voting shares, and 50% in interest-free debt. (Today, the company said its UFB build would cost it $1.4 billion to $1.6 billion to 31 December, 2019. Minus the funds chipped in by the government, that will mean Chorus has to fund in the region of $470 million to $670 million.)

In Telecom's annual result announced August 19, Chorus had ebitda of $806 million (+5%). Telecom Wholesale, most of which is being rolled into Chorus, had ebitda of $119 million (-42%) for a combined $925 million.

The remaining divisions, which will constitute "New Telecom" (Retail, Gen-i, APPT and Corporate) reported combined ebitda of $876 million.

In its statement today, the company used pro forma calculations and one-offs to flip the order, giving New Telecom more earnings:

On a pro forma basis for the year ended 30 June 2011 (FY11), New Telecom generated revenue and other gains of NZ$5,071 million, EBITDA of NZ$885 million and EBIT of NZ$178 million. After removing the gain from the sale of AAPT's consumer division and the effect of certain one-off costs and asset impairments2, New Telecom earned adjusted pro forma EBITDA of NZ$1,125 million.

On a pro forma basis, Chorus generated revenue and other gains of NZ$1,050 million, EBITDA of NZ$606 million and EBIT of NZ$286 million. After removing the effect of certain one-off costs and asset
impairments4, New Chorus earned adjusted pro forma EBITDA of NZ$676 million.

Split should take place by November 30
Telecom also said today that the "scheme booklet" for the split would be released around mid-September, and that it expected a shareholder vote to take place by November 30.

Bondholders must also approve the separation.

A split into two separately listed companies is a pre-condition of Telecom's participation in the Crown Fibre project - with the extra wrinkle that the recently-passed Telecommunications Amendment Act removed the Kiwishare provision, allowing for the sale of New Telecom to a foreign owner.

Listing details
Telecom investors will retain their holdings as shares in New Telecom. They will also receive one New Chorus share for every five Telecom shares.

That company said it anticipated  New Chorus will be listed on both NZX and the ASX.

It is expected that New Chorus will qualify for inclusion in the NZX50, however, New Chorus may not remain eligible for inclusion in the ASX200 index or the MCSI World (Standard) Index. New Chorus will not be listed in the US. However it will have a level 1 ADR (American Depository Receipt) programme, which will allow ADR holders to buy and sell ADRs on the Over The Counter (OTC)
market.

New Chorus dividend
Telecom said it is anticipated that for the 2012 financial year New Chorus will adopt a dividend policy to pay out 25 cents per New Chorus Share per annum - noting that one New Chorus Share will be issued for
every five Telecom shares.