Chorus shares at record low on heightened anxiety over price cut impact, govt response

Thursday 7th November 2013

Chorus shares sank to a record low as investors are left to speculate on how the government will respond to regulated price cuts the network company says will undermine its finances and its role as builder of the national ultra-fast broadband network.

Chorus fell as much as 9.7 percent to $2.09, or 29 percent below its listing price of $2.94 in November 2011, when it was spun off from Telecom. It recently traded at $2.16. About $186 million has been shaved off the company's market value since the Commerce Commission announced the price cuts this week.

Communications Minister Amy Adams yesterday gave chief executive Mark Ratcliffe 1 ½ weeks to review Chorus's capital management, dividend policy and potential need for a major equity raising in order to meet its contractual obligations over UFB and the rural broadband initiatives. Its analysis, required by Nov. 18, will then be folded into the government's review of options and arm's length assessment of Chorus's financial position.

"It's an extremely difficult position for the company to be in," said James Lindsay, portfolio manager at Tyndall Investment Management. "The government has come under significant political pressure as well. They've done the right thing to get an independent assessment. But the period of time of delay just increases the level of anxiety for investors."

Adding to the political pressure, telecommunications company CallPlus today said it 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.

While the proposed cuts were welcomed by phone companies forced to pay for access to the copper lines, Chorus warned they would potentially undermine the government's UFB strategy.

Telecommunications Commissioner Stephen Gale this week said the regulator has set a total unbundled bitstream monthly price, which phone companies and ISPs pay, of $34.44 per line, up from the $32.35 price Gale proposed in his draft decision last December. The price cut kicks in from December 2014.

The amended price is still 23 percent less than the $44.98 Chorus currently charges retailers and the company this week estimated the impact would include an annual earnings hit of $142 million and potential funding shortfall of $1 billion by 2020. Moody's Investors Service and Standard & Poor's both have its credit ratings on review for a possible cut.

Adams made clear today that the government won't accept Chorus's figures at face value and has ordered up "an independent assessment at arm's length from the government."

The review will look at the impact of the regulator's pricing decision on Chorus' ability to deliver on its contractual commitments under the UFB and rural broadband initiatives as well as assessing "the scope for Chorus to manage the impact within the constraints of the reduced revenue, and if required, a range of alternative options," she said.

In a separate letter to Chorus chief executive Mark Ratcliffe yesterday, Adams said she is "seeking your full cooperation on this."

In response today, Chorus said in a brief statement that it "will now engage with the government on how it may assist with this process."

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 $1.5 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.

BusinessDesk.co.nz

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