Chorus has difficult choices to make. Photo supplied.
Infrastructure company Chorus faces another tough week as
debate continues on its future.
Shares in the company continued to fall yesterday, as more
broker reports were released questioning the viability of
Chorus' ability to complete the Government's prized
ultra-fast broadband project.
Craigs Investment Partners broker Chris Timms said while the
political will for Government on copper network pricing had
been fading, it had now been taken off the table.
The last hope for Chorus had been extinguished and the
company had difficult choices to make, he said.
Late in the day, Chorus announced it had applied to the
Commerce Commission for a final pricing principle review.
Chorus was also filing for a High Court appeal of the same
The commission ruled access to the Chorus copper wire network
by internet service providers (ISPs) should be halved,
leading the company to issue a warning its 2015 profit would
be cut by $142 million with $1 billion of funding at risk.
Mr Timms said there was no timetable for either the appeal or
the review and that created more uncertainty for
Information and Communications Minister Amy Adams had been
planning to legislate to overrule the commission but
political support for her plans evaporated late last week,
when support partners Act New Zealand, United Future and the
Maori Party joined the Opposition in opposing a legislative
There were suggestions Chorus should walk away from the UFB
contract but Mr Timms said that was not a ''credible''
''Chorus does not have a termination right.
''It has committed to the Crown as a counter party that it
will roll out UFB according to very specific parameters.
Chorus cannot walk away from its commitment to roll out the
UFB without facing significant penalties and consequences,
which include liquidated damages and Crown Fibre Holdings
taking management control.''
The UFB was a flagship Government project, with wide
political support, he said.
With the key option Chorus had been waiting for over the past
year - Government intervention on copper - formally taken off
the table, the company might be closer to providing clarity
on its capital structure-dividend policy, Mr Timms said.
There were good reasons why Chorus should be looking at an
option which avoided raising equity, at least in the short
Raising equity had the greatest potential to ease uncertainty
around capital structure and financial strength, but such a
move would result in the company seeking further investment
at the point of maximum uncertainty.
Chorus would be unable to provide investors with any
confidence concerning the UFB project and capital
expenditure, the outcome of the copper pricing appeal or any
progress towards a new regulatory framework, he said.
''While the prospect of a suspension of dividends for a
period will clearly put further pressure on Chorus' register,
the alternative of raising equity under current conditions is
not palatable, either.''
Craigs believed a pro rata rights issue was the only other
viable alternative and it would need to be underwritten, Mr
Chorus has the potential to provide stable
infrastructure-like cash flows in the long term. However, in
the medium term, Chorus' outlook was dominated by regulatory
uncertainty in relation to copper pricing and risks around
the build costs associated with the ultra-fast broadband
project - both of which are contributing to an outlook for
reduced dividends and a potential equity ratio. In addition,
Chorus does not have clarity on the regulatory framework to
apply beyond 2020 and what it will mean for the pricing of
its copper and fibre. There is limited visibility on how
Chorus can improve margins and grow revenue against
reductions in copper pricing and a fall in access line. Our
recommendation is hold - Chris Timms