Communications and Information Technology Minister Steven Joyce this week released the "Invitation to Participate" in the partner selection process for the Government's $1.5 billion ultra-fast broadband investment plan. Once again New Zealand's largest listed company, Telecom, is in the firing line. Business editor Dene Mackenzie reports.
Telecom again faces market uncertainty following the "Invitation to Participate" in the Government's $1.5 billion ultra-fast broadband investment plan.
Communications and Information Technology Minister Steven Joyce, a former radio station chain owner and multimillionaire, has started the process of seeking private sector partners who will co-invest with the Government in the UFB (ultra-fast broadband) fibre infrastructure.
The invitation provided the terms and conditions of the Government's investment, including technical specifications and the Government's preferred commercial model for co-investing with partners in a local fibre company (LFC).
Mr Joyce said the invitation was based upon an innovative commercial model that would result in the Government largely funding the deployment of fibre into communities.
The Crown's LFC partner would gradually take a greater share in the LFC as it connected customers.
"This risk-sharing model overcomes the major hurdle of uncertain demand," he said.
The LFC would deploy, own and operate the open access network in a given coverage area.
People wanting to participate have until November 13 to notify the Ministry of Economic Development.
Proposals must be lodged by January 29, 2010.
Craigs Investment Partners broker Chris Timms said the proposal prohibited involvement in the UFB if tenders were not submitted during the current round, highlighting the chicken and egg paradox for Telecom.
"Sitting on the sideline is not an option for Telecom. Risks around duplicative infrastructure and or accelerated capital investment appear to have increased for Telecom, based on the proposal.
"We find it difficult to envisage anything other than a value negative outcome for Telecom at this time," Mr Timms said.
The "back of the envelope" assessment of the risk was about 40c a share, suggesting an ongoing cap on share price performance, he said.
Forsyth Barr broker Suzanne Kinnaird retained a hold on Telecom shares after Mr Joyce's announcement.
"On a net basis, this is neither better nor worse for Telecom than previously. We expect Telecom to participate in the process but to propose an alternative structure.
"Our forecasts remain unchanged at this stage with a valuation of $3.60 but a hold recommendation due to the level of uncertainty."
Craigs has a target price of $2.56 on Telecom.
Mr Timms said the Government's commercial model in the invitation proposal cleverly mitigated the uptake risk for participants.
Under the model, the Government would fund the fixed cost of deployment to premises passed (down the street) while the private sector funded the variable cost of connecting end users (from the street to the house).
Craigs estimated that if the Government funded all the fixed cost down the street, it would cost around $2000 per premises, while the LFC partners funded the variable cost of $1000 from the street to the house.
Mr Timms said that ensured Government money was focused solely on the dark fibre (open to everyone) investment bottleneck, given there was no commercial incentive to make it available.
It was a pay-as-you-go model with the risk of a zero take-up falling on the Crown.
Lines companies that did not face Telecom's legacy issues related to asset migration, accelerated capital expenditure and revenue cannibalisation appeared to have the most to gain.
The regional approach provided the best hope for the Government to get bidding tension in the process.
"This leaves Telecom in a delicate position given the risk of being cherry-picked in major metro areas."
The key risks for Telecom were in the major metropolitan areas of Auckland, Wellington and Christchurch where the more credible potential competition might arise, Mr Timms said.
Telecom continued to reserve its position in respect to the UFB.
Public comments from the management team suggested it was broadly supportive of the Government's objectives.
Telecom might consider national proposals involving the migration of a proportion of its customers from copper to fibre-to-the-home over a period of time in exchange for a variation on its current commitments and undertakings.
However, Mr Timms found it difficult to envisage anything other than a negative value outcome for Telecom.
