Telecoms 'gravy train' ends

Telecom has warned it is in for a multimillion-dollar earnings hit for three years as a result of the Government's rural broadband plans confirmed yesterday.

The telco advised the New Zealand Stock Exchange its earnings before interest, tax, depreciation and amortisation (ebitda) would be hit by up to $56 million in each of the 2011, 2012 and 2013 financial years as a result of the policy to pay for the roll-out of high speed broadband to 97% of rural people.

The market appeared to have factored in the news, as Telecom shares closed down 5c at $2.17 yesterday on reasonable volume of 7.45 million shares.

Shares in all major NZX stocks were weaker yesterday.

Craigs Investment Partners broker Chris Timms said Telecom shares were already trading at historic low prices after the company's XT network issues, and it appeared investors had factored into the share price the risk of further Government regulation.

An analysis by Craigs Investment Partners concluded the policy would be positive for Vodafone, as it ended the telecommunications service obligation (TSO) "gravy train" for Telecom, replacing it with an industry levy to fund the deployment of fibre in commercially non-viable rural areas.

Communications Minister Steven Joyce said yesterday the policy would cost $300 million, and be funded by a $48 million Government grant and $252 million from a new telecommunications development levy (TDL).

Deploying the infrastructure would start early next year.

Mr Joyce said Telecom would continue to be compensated for supplying local telephone services to areas where it was not commercially viable, but the compensation would take into account the full benefits and costs of being a nationwide service supplier.

"It is anticipated that the benefits of being a nationwide supplier of telecommunications service obligations (TSO) will outweigh the costs for the foreseeable future and that consequently Telecom will not receive additional compensation under the Telecommunications Act 2001."

Under the Act, Telecom can recover from other telcos a contribution for servicing unprofitable rural customers through the TSO, which was administered by the Commerce Commission.

Contributions were based on revenue share, with Telecom paying about 65%, Vodafone 30%, TelstraClear 4% and the balance from smaller players, but it was expensive to administer and historically out of date.

The Government has argued that Telecom has the ability through annual consumer price index adjustments to recover and absorb the cost of servicing those customers.

The replacement levy, or TDL, will be capped at $50 million a year for five years and administered by the Government to pay for its rural broadband initiative, upgrading emergency call systems and any TSO charges should Telecom, as has been provided for, argue it has a case.

After six years, the TDL was expected to wind down to $10 million a year.

The Craigs analysis estimated Telecom would pay $33 million a year towards the TDL, instead of receiving $23 million a year from the TSO.

This represented a worst case scenario hit on earnings before interest and tax (ebit) of $50 million a year, or 7c a share.

In comparison, Vodafone would see its share of the TSO drop from $23 million a year at present to a share of the new levy of $15 million.

"The TSO's days were always numbered in our view, but today's proposals create further headwind for Telecom," Craigs said