Reynolds’ veiled threat

Reviewing Telecom’s Thursday investor day presentations over the weekend (hey, I’m a fun guy), one line about Crown fibre really stood out.

“Non-participation would entail continued selective investment in fibre. For example, to business customers and metro sites where it makes commercial sense,” chief executive Paul Reynolds said half way through his presentation, his voice noticeably tightening.

Translation: if Telecom is blocked from the government’s $1.5 billion ultrafast broadband (UFB) tender, it would cherry-pick the most valuable home and business customers for its own fibre roll-out, making life a lot harder for the likes of, say, a Crown partner like Vector in Auckland or Citylink in Wellington that was obliged to cable all-comers.

TelstraClear chief executive Allan Freeth has made similar comments - but then again he’s not trying to pitch for the government’s business.

Dr Reynolds, on the other hand, has embarked on a high-risk carrot and stick strategy.

Life in the old bird yet
The Telecom boss showed a bit more of stick at the investor day, backing up his selective fibre investment threat with a quip about copper that “there’s life in the old bird yet”.

And with his observation that VDSL, which Chorus will launch in August, is already delivering 40Mbit/s download speeds over copper to his Auckland home.

Translation: a shut-out Telecom would go hell-for-leather promoting VDSL as a lower-cost, near-the-same-speed alternative to fibre over the next few years, again making life harder for Crown fibre start-ups.

De-merger = de-risk
Dr Reynolds also showed a bit more carrot, of course, as has been well covered, further discussing structural separation and throwing in the possibility of a “de-merger”, or splitting Telecom Retail and Chorus into two separately-listed companies.

“Which of the two businesses is going to be successful?” mused the chief executive.

“The thing about the idea of a de-merger option is shareholders would be invested in both and we could be kind of de-risked from some of the future uncertainties of the market structure,” he added.

(One things for sure, the English language is de-volving the further we get into the UFB tender.)

Dr Reynolds himself owns a far whack of his company's shares; options form a substantial part of his renumeration package. His interests are clearly aligned with shareholders, as the board as has engineered. It's not so clear if he can bend reality to align the government's interests as well - but he's certainly giving it the college try.

Joyce: Govt would not buy Chorus, but ...
If de-merger does go ahead (and hold your breath, it could still take six to 12 months to sort out), one option is that the government take a stake in a spun-off Chorus, and remaining shares be distributed to Telecom shareholders

Last week, Communications Minister Steven Joyce moved to scotch persistent rumours that the government would buy Telecom’s Chorus division.

His statement came on the back of Telecom’s admission that it is considering the structural separation of its retail and wholesale operations as the price of admission to the government’s $1.5 billion Crown fibre initiative.

Keallhauled asked the minister’s office to clarify his comment, which is where things got more tangled.

“It is the government's intention to invest in the provision of fibre in the ground that would not have otherwise be there without the government's investment,” a spokesman said.

“The government wouldn't be interested in buying existing assets off other shareholders.”

So the government couldn’t buy Telecom from Chorus? Or take a stake.

Well, actually, there is a possible scenario. “The government could theoretically look at putting new money into an existing entity provided it was ring-fenced to the fibre to the home initiative,” said the spokesman.

Bottom line: almost everything’s still on the table.

And, for good measure, another possible Chorus outcome
Of the myriad possible futures being prophesised for Telecom’s networking division, Keallhauled most likes that outlined by Forsyth Barr’s Guy Hallwright.

The analyst reckons structural separation “will involve Chorus being progressively sold into the UFB project in exchange for shares in the fibre network(s).

The terms of these deals will be the crux of it, but Mr Hallwright, for one, believes Telecom now has more upside than down.

Last week, he upped his Telecom rating from hold to “accumulate”. He now stands alone, across Australasia, as the only analyst with a buy rating on the beleaguered telco.

Telecom shares (NZX: TEL) were up 4 cents to $1.90 in midday trading.