Telecom hits back at new rules

Wayne Boyd and Theresa Gattung are worried about the effect new regulations will have on investment. File Picture / Martin Sykes

Telecom and the New Zealand sharemarket are being destabilised by uncertainty over the regulatory environment the company will face, says new chairman Wayne Boyd.

Speaking at Telecom's subdued annual meeting in Wellington yesterday, Boyd also said consideration of the need for investment in new infrastructure was being overshadowed and delayed by the focus on competition issues in the regulatory debate.

He told shareholders the company's hard times would last another two years as it got to grips with the new regulations and overhauled its business.

Telecom has suffered a $3.3 billion drop in its sharemarket capitalisation since May, when the Government announced its intention to force the company to open its "local loop" to competitors.

That has weighed heavily on the New Zealand sharemarket, in which Telecom accounts for almost 14 per cent of the market's total value of $61.73 billion.

"Uncertainty over the future structure of Telecom is destabilising for us, the industry as a whole, and the capital markets," Boyd told shareholders.

The Government is considering legislation to force Telecom to produce separate accounts for its business divisions. It believes this will increase transparency and competition in the wholesale broadband internet market.

The company has tried to head that off by saying it will voluntarily separate its retail and wholesale divisions, a measure it says goes further than the Government's proposal.

Its rivals say Telecom's plan does not go far enough, and it should separate its networks business.

Yesterday Boyd called for a speedy resolution to the debate.

"We have highlighted in our submission to the select committee that policy indecision and any prolonging of the debate about models of separation will inevitably impact on Telecom's short-term, medium-term and long-term investment decisions. We cannot invest where we cannot see a return on that investment."

Boyd also criticised coverage of the regulatory debate for focussing on competition issues.

"We want competition but we must have investment."

Responding to one of only two questions from shareholders at yesterday's meeting, chief executive Theresa Gattung said it was not certain that the Government's proposed changes would promote investment.

Legislation would provide a framework, but investment would ultimately depend on prices, which would be set by the Commerce Commission.

She said the Government should make it "crystal clear" in legislation that investment and competition were both needed, and direct the commission to be mindful of that.

But the executive director of online community advocate Internet New Zealand, Keith Davidson, said Telecom had had "many years in which it could have invested more".

"It's chosen to seek investment options overseas, perhaps at the expense of being able to invest in local infrastructure that may have generated greater income."

The company has also paid a high proportion of its profits in dividends to shareholders.

"You could potentially suggest that Telecom has had shorter-term objectives of meeting shareholder expectations rather than longer-term expectations of satisfying customers," he said.

"Its ability to do that is essentially because it controls the local loop and is therefore a monopoly."

Telecom reduced its dividend payout ratio for this financial year from 85 per cent of net profit to 75 per cent after reporting a substantial loss on its Australian AAPT investment.

Boyd said the next couple of years would not be easy for the company, but it was creating a strong platform for growth.

Apart from dealing with the new regulations, Telecom would, over the next two years, work on what it calls "Next Generation Telecom", which it says " is all about being a leaner, more customer driven business".

It would also concentrate on protecting and enhancing its core business and on "exploring new options to add growth and value".

Those options include its online shopping business Ferrit and a "scoping study" of its Yellow Pages directory business.

Telecom shares closed unchanged at $4.27 yesterday.