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Chorus open-minded on owning mobile network assets

Thursday 31st October 2019

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Chorus is keeping an open mind about investing in mobile network assets as the 5G internet revolution approaches, but is not commenting on analysis suggesting it could be a buyer for assets built by New Zealand's third-largest mobile player, 2Degrees.

"There is increasing convergence over time between cellular networks and fixed line networks," Chorus chairman Patrick Strange told BusinessDesk after this morning's annual meeting in Wellington. "We follow that pretty closely."

The fixed-line and fibre telecommunications network operator was already involved in mobile services to the extent that its network provides so-called 'backhaul', with expectations that 5G would require 16 times more backhaul than the current 4G mobile network because of the gargantuan quantities of digital data that 5G will be able to handle.

The next-generation technology is expected to exponentially increase the spread of the 'Internet of Things', where digital telecommunications will control all manner of devices, processes and services, from self-adjusting fridges through to driverless vehicles.

"We're looking strategically about how we should participate in what will possibly be a merged business," said Strange. "We keep having discussions but we would never comment on a specific instance," he said, when pressed on a recent note to clients from Arie Dekker, the head of research at New Zealand's largest investment services firm, Jarden.

Dekker suggested that 2Degrees does not have deep enough capital backing to participate fully in a 5G rollout and that Chorus could emerge as a buyer, as long as it only bought the network assets rather than 2Degrees' customer base, which would likely run into competition issues and is at odds with Chorus's role as a network operator.

"We're not interested in retailing or anything like that," outgoing chief executive Kate McKenzie said. "The only things that are potentially interesting are things that fit with Chorus and you keep an open mind to those things."

Strange said there was "nothing on the boil" at present, but "we look at lots of things like that."

"In a country the size of New Zealand, we can't have three mobile networks in (the fullness of) time. The costs of 5G just don't support it, so it makes sense for there to be a shared network. I think the world is coming round to that view. Long term, Chorus is a logical operator. We do networks really well."

McKenzie rattled the cage with major retail telco Spark when she suggested in 2017 that a shared mobile network was a logical outcome for New Zealand. Spark's CEO at the time, Simon Moutter, saw that as an attempt by Chorus to extend its near-monopoly position in fixed-line services to the mobile market.

Strange told shareholders that the current review of Chorus's regulatory settings by the Commerce Commission would be a major test for international investors with an appetite for infrastructure projects in New Zealand.

"While the UFB (national roll-out of fibre for ultra-fast broadband) is nearing completion, there are a number of other large New Zealand infrastructure projects that must get underway in the coming years. Recent Treasury figures indicated that some $130 billion needs to be invested over the next 10 years to get New Zealand’s infrastructure up to scratch to meet significant population growth and ever-increasing demands."

Given Chorus's experience of big swings in regulatory intervention during the UFB project, which saw the Chorus share price whipsaw over several years, "a key signal to potential investors about the risks of investment in New Zealand infrastructure will be the Commerce Commission’s implementation of the regime that will govern the new fibre broadband network built by Chorus," said Strange.

"These international investors - including many of our current shareholders - are watching the Chorus regulatory process very closely. If they sense that they are not going to get a fair return for the multi-billion dollar investment they made, a return that reflects the considerable risk they took and the long period they have waited for a return, this will be the last investment they and their investment community will make in New Zealand infrastructure.

"They have choices about where they put their money, and we are competing with other nations for it."

Chorus shares were down 1.7 percent at $5.29 in early afternoon trading, taking this year's gain to 9.1 percent. 

(BusinessDesk)



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