An independent report by Grant Samuel included in a 532-page scheme booklet sent to Telecom’s shareholders yesterday recommends that the proposed demerger take place, despite risks for investors post-merger.
“The Proposed Separation is not without risk,” the Samuel report states.
“Importantly for New Telecom, while it is released from substantial regulation, it loses the reliable income from ownership of a fixed line network. New Chorus is burdened with the majority of TCNZ’s current debt, reflecting its stronger and more robust underlying cashflows.”
The Samuel report states that the benefits of the proposed separation are largely subjective, but on balance shareholders are better off voting for a demerger.
“Under a base set of assumptions Grant Samuel estimates the cooperate scenario [that is vote for demerger and participate in Ultra Fast Broadband] is approximately $0.5 billion better than the compete scenario, equivalent to approximately 28 cents per share.”
If the majority of Telecom’s shareholders agree to a demerger they will each receive one in share New Chorus for every five Telecom shares. The cost of the demerger is expected to reach $150 million.
Crown Fibre Holdings will invest $929 million in New Chorus, which is a mix of equity and debt. The equity securities will not enable CFH to have voting rights at meetings of New Chorus shareholders, and will not attract dividend payments before 2025. The CFH debt securities will be unsecured and non-interest bearing, and are to be repaid by June 30, 2036.
In return, by 31 December 2019 the New Chorus fibre access network must pass approximately 830,900 premises, with around 149,000 premises passed by June 2013 and around 106,000 premises passed each subsequent year until completion.
The risks
The scheme booklet outlines the risks in relation to New Chorus and New Telecom following demerger.
For New Chorus these risks include an unforseen rise in the cost to deploy UFB and uncertain end-user demand for fibre. If New Chorus doesn’t meet CFH’s milestones, or achieve the required investement grade credit rating, it may incur financial penalties.
The document also notes that New Chorus will be reliant on New Telecom for about 84 percent of its business. “Because of this dependency, any disruption to the relationship between New Chorus as a supplier and New Telecom as a customer could have a material adverse effect on New Chorus,” the document states.
The risks for New Telecom include a failure to effectively operate sharing arrangements with New Chorus which affect New Telecom’s financial position and performance. Also, the Commerce Commission may consider the sharing arrangement contravenes the Telecommunciations Amendment Act and decide on enforcement action (although there is a provision for the ICT Minister to grant an exemption).
Ties that bind
The shared arrangements between the two companies following the proposed demerger will be overseen by the Commerce Commission and be the subject of arms-length commercial agreements.
“The sharing arrangements relate to a number of different processes, typically last up to three years and there’s a minority of network assets that will last a bit longer than that,” Reynolds told media in a conference call yesterday. “So there’s not duplication and its all controlled by Commerce Commission oversight.”
Computerworld asked if regional backhaul and national backhaul would be owned by both New Chorus and New Telecom as a shared asset but New Chorus CEO-elect Mark Ratcliffe replied that it was about shared use, not shared ownership.
“The ownership will be clearly one entity or the other and there will be commercial arrangements in place for the use of one of the assets owned by the other one.”
Governance between CFH and New Chorus
A steering committee of up to seven members will govern the New Chorus UFB rollout. There will be three representatives from CFH and three from New Chorus with an independent chair to be announced shortly.
In addition, a senior committee (consisting of the chairs of New Chorus, CFH and the above steering committee) will be “responsible for overseeing the decision-making rights around the Fibre Commitments and Chorus’s fibre business plan where agreement cannot be reached by the Steering Committee and the New Chorus Board.”
At a management level, there will be relationships managers for both and CFH that will meet regularly, and a Project Control Group (consisting of four members, equally divided between CFH and Chorus) that will oversee the technical, project management and operational issues.
Ratcliffe says that New Chorus is not a Local Fibre Company in the way CFH’s other partners are, so the arrangements “respect the fact that Chorus will be a publically listed company, with all the responsibility for directors that go with that.”
“Being in receipt of $929 million of government funding, the governnment has been quite rightly keen to ensure there is a well developed process for engagement between government and the New Chorus oganisation to ensure the build is done in the right way, and performance standards are met,” Reynolds told the media conference call yesterday. “So we think that the performance arrangements that came out today are entirely appropriate to meet government needs and our needs.”
CEO and board remuneration
According to the shareholder documents, Ratcliffe’s remuneration as New Chorus CEO will be a fixed annual salary of $750,000. In addition he is entitled to participate in an annual discretionary cash-based incentive plan that has a target annual value of $420,000. Ratcliffe will be awarded a grant of $200,000 under the New Chorus equity link scheme and his long term incentive plan has a target value of $250,000.
New Chorus chair-elect Sue Sheldon will receive a base fee of $200,000 and non-executive directors will receive $100,000.
Telecom chair-elect Mark Verbiest will receive $330,000 as a base fee and non-executive directors will receive a base fee of $130,000. There is no specific amount given for the Telecom Retail chief executive, however later in the document it details what Paul Reynolds’ was paid for the year ending June 30 2011 (this was publically released by Telecom last week).
The proposal to demerge will be put to vote at Telecom's annual meeting on October 26. If approved, and providing other conditions are met, Telecom expects to structurally separate by November 30.
The scheme booklet and other documents relating to the demerger are available online here.