Telecom boss utters the 's' word as share price drops
Tuesday, 25 May 2010
Telecom is facing a possible credit rating downgrade and its shares nudged a new record low yesterday after the firm announced an investigation into splitting the business in two.
A rating agency warned a split would have a 'material negative impact on Telecom's business risk profile'.
Communications Minister Steven Joyce welcomed the separation announcement but ruled out the Government investing directly in Telecom's network business, Chorus.
Telecom chief executive Paul Reynolds indicated he was open to structural separation last month, but yesterday was the first time he explicitly used the 's' word, as it has become known within the firm.
'Telecom is undertaking a thorough assessment of the merits of structural separation,' Mr Reynolds said. 'We are conscious that we should all be focused on how best to create New Zealand's fibre future.'
Mr Reynolds said he would not see separation as an opportune time to step down as chief executive. 'I love my job. I'm here unless the board thinks I am not doing a good job.'
Investors sent Telecom shares down 3c to $1.96 in a rising market on the news, after shares went ex-dividend, cementing Telecom's new lowly status as a sub-$2 stock.
Standard and Poor's revised the outlook on Telecom's long-term credit rating to negative, from stable. Paul Draffin, a credit analyst at the agency, said any separation of Telecom's fixed-line access network would have a 'material negative impact on Telecom's business risk profile'.
Structural separation could allow Chorus to take responsibility for rolling out fibre-optic cable to three-quarters of the country, as envisaged under the Government's $1.5 billion ultrafast broadband (UFB) initiative.
Mr Joyce rejected a formula floated by Telecom adviser Richard Hooper, former deputy chairman of British super-regulator Ofcom, who proposed the partial sale of network arm Chorus to the Government and other investors.
The Government had no plans to purchase part of 'any existing business' and would only invest alongside a private sector partner, in new infrastructure, Mr Joyce said.
The distinction was of practical rather than just political importance, he said.
'Whoever we end up working with will obviously have access to government capital' and would share a return from the fibre network, but the Government's investment would be 'tagged very clearly'.
Mr Reynolds said Telecom needed to know whether changes to undertakings it had agreed with the Government would be allowed, before it could continue negotiations with the Government's UFB investment vehicle, Crown Fibre Holdings.
Telecom would continue rolling out faster copper-based broadband to all towns with more than 500 phone lines, but wanted to suspend switching customers over to new management systems designed to ensure its retail arm got the exact same service as other internet providers.
Telecom also sought permission to delay migrating customers off its Public Switched Telephone Network and on to internet telephony.
It is currently required to switch over the first 17,000 customers by the end of the year.
Mr Reynolds would not say whether Telecom envisaged keeping a minority stake in Chorus if the business was split, or who might be its new owners, saying there were many ways to achieve structural separation.
What was important was that the Government's and Telecom's interests were aligned and that the right incentives were in place to ensure the migration of customers from copper to fibre.
It was 'very realistic' to believe three-quarters of homes and businesses could be connected with fibre within 10 years, he said, but it would take longer if there was not a 'joined up plan with the Government'.
Telecommunications Users Association chief executive Ernie Newman said the association was keen to see Telecom split up.
'We are delighted it's there on the table.
'We think there is a lot of discussion to go under the bridge and there is a potential for it to be a win for New Zealand as well as for Telecom.'