Chorus investors in the money but CEO fears they won't feel rewarded

Monday, 24 August 2020

When Telecom was split, Chorus was supposed to be the boring but safe investment while Spark was supposed to be the riskier but exciting part.

When Chorus was split out from Telecom in 2011, it was supposed to be the safe but boring part of the business but shareholders instead have reaped bumper returns after a rollercoaster ride.

Despite that, Chorus chief executive Jean-Baptiste Rousselot fears they may not be rewarded for the risks the company took investing in ultrafast broadband, querying whether a similar investment could get off the ground again.

Shares in Chorus surged 3.2 per cent in early afternoon trading on Monday to a record $8.30 after the broadband network company reported a little-changed profit of $52 million for the year to June.

That is nearly three times the $2.94 price the shares first traded at when investors in Telecom, now Spark, were given one Chorus share for each five Telecom shares they owned in November 2011.

Chorus also forecast a solid dividend of 25 cents per share for the year ahead.

Chorus chief executive Jean-Baptiste Rousselot believes the Commerce Commission’s reduced appetite for rewarding Chorus for past commercial risks, could threaten any future UFB-type investment.

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Spark, which was supposed to be the more exciting but riskier part of the Telecom business, has also rewarded investors but not quite as much, rising from a post-split adjusted price of $1.94 in 2011 to $4.95 on Monday.

Chorus investors have been through some dark times.

E tū union organiser Joe Gallagher believes Chorus shareholders can have little cause for complaint.

Shares in the business crashed below $2 late in 2013 when the Commerce Commission threatened to slash the wholesale price Chorus could charge telecommunications retailers for its copper network.

Then prime minister John Key warned there was a chance Chorus might “go broke'' if the regulator’s initial recommendations stood.

Despite riding out that crisis, the risks may not be over for Chorus investors.

Another regulatory battle is on the horizon, this time over the price Chorus may be allowed to charge telcos for its ultrafast broadband network.

The commission has proposed changing the way it will calculate Chorus’ allowable costs when it sets the price for fibre connections.

Newly appointed telecommunications commissioner Tristan Gilbertson said it wanted to avoid the risk of “windfall gains or over-recovery” of costs incurred by Chorus.

Rousselot said on Monday the commission would make its final decisions on the key aspects of the new regulatory regime for UFB over the next few months.

“Under the current proposed settings, investors will not get a return that reflects the risk they took,” he said.

“Instead the commission’s approach banks the success of the build and, with the benefit of hindsight, effectively de-risks it.

“If this occurs, investors will not consider UFB a model for the successful transformation of additional New Zealand infrastructure,” he said.

Rousselot’s concerns were rejected by E tū union organiser Joe Gallagher, who said the company had passed on risks associated with the UFB build to its subcontractors where it could.

Last year, a report commissioned by Chorus acknowledged that the company had failed to sufficiently oversee the subcontracting model of its two prime contractors responsible for connecting homes to UFB, whose own practices were 'not sophisticated enough' to protect those workers from exploitation.

The report was commissioned in the wake of Labour Inspectorate raids on subcontracting firms working on the UFB network which found more than 100 had breached labour laws.

Its author, former States Service deputy commissioner Doug Martin, said evidence was presented to Chorus' board in 2016 that “with hindsight' should have the alerted it to the risks.

The report also revealed that more than half of the 1600 workers then hooking up homes to UFB for Chorus were migrants on temporary work visas, and that more than 70 per cent had English as a second language.

Gallagher said Chorus’ model had been designed so “all the risk sits at the bottom as it has for years” while the company continued to earn good profits.

Chorus’ criticism of the Commerce Commission appeared “a little bit hysterical” and shareholders could hardly complain, he said.

“What are they going to do? Leave New Zealand and pull out of it?

“They have been making good returns.”