Chorus split costs prohibitive

Structural separation could cost $2 billion, Telecom sources say

Telecom could face a $2 billion bill if it goes a step further on the separation path and spins off its network business Chorus, according to sources within the telco.

The company is under pressure to divest Chorus, as this appears to be the only way it can be involved in the government's $1.5b urban broadband fibre proposal.

Telecom spokesperson Ian Bonnar says he can't say exactly how much it would cost to divest Chorus, but it would be expensive.

"We have modelled several variations and we have yet to develop a model that would deliver value to shareholders."

Full structural separation (the only way under present rules that Telecom could muscle in on the Government's plan) would have significant upfront costs and be likely to require an increase in ongoing operational costs due to duplication of some functions that are currently shared, he says.

Telecom chief executive Paul Reynolds has written off structural separation and is disappointed that the Government's plans appear to preclude Telecom's involvement.

The telco has already split into three units, retail, wholesale and network, dubbed "operational separation".

IDC analyst Rosalie Nelson says structural separation would be much more complex and challenging than operational separation.

Goldman Sachs analyst Tristan Joll says Telecom has spent $170 million on operational separation in the 2008 and 2009 financial years, after the previous management forecast it would cost $200m over five years.

"What they are already doing, which is a much smaller version, is costing a lot," says Joll. "You can't just say tomorrow you're going to be in different bits and that's it. It involves a lengthy transition period."

Auckland-based Craigs Investment Partners analyst Geoff Zame says spinning off Chorus would be expensive, but not $2b. "If that's the songbook [Telecom] want to sing to, then clearly they'll talk about the prohibitive costs."

Operational separation could ultimately lead to structural separation, as Telecom has already ring-fenced the assets, management, support and services part of the business, he says.

Australian-based Craigs Investment Partners analyst Ian Martin says Telecom faces three levels of cost in a structural split: operating separate premises and systems; loss of synergy in operations; and loss of economies of scale.

Across the ditch, observers believe incumbent telco Telstra is seriously considering structurally separating over an operational split. In Australia, the government's definition of structural separation doesn't necessarily require the demerger of Telstra's fixed network assets, but a progressive migration of its fixed-line services on to the government's planned fibre network.

The Australian Government gave an ultimatum to Telstra in September: split your wholesale and retail operations or risk losing access to wireless broadband.

This happens as the government is developing plans for a A$43b (NZ$54b) broadband fibre network, with a structure similar to that of New Zealand's proposed Crown Investment Company.

In 2003, Telstra estimated a one-off cost of A$2b to structurally separate, plus annual operating costs of $80m, according to telecommunications consultancy company Network Strategies.

Telstra has since estimated it will cost between A$500m and A$1.2b to operationally separate, but it isn't giving current figures on structural separation costs.

Meanwhile, Joyce said yesterday he was pleased with the high level of interest from parties seeking to participate in the Government's fibre rollout. So far, 38 groups had expressed interest, including "several significant international players" and a strong selection of local companies.

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