The broadband scramble

Crown Fibre Holdings have been tasked with the job of picking a shortlist of bidders to take part in the high-speed broadband network. Photo / Herald Graphic

Within the next few weeks many bidders to take part in the Government-backed rollout of a high-speed broadband network will be knocked out of the game.

Tasked with the job of picking a shortlist is Government entity Crown Fibre Holdings.

Behind closed doors - these are commercial negotiations, after all - Crown Fibre Holdings will have been lobbied, cajoled, reasoned with and sweet-talked by everyone from Telecom to local lines company players.

Everything is on the table. In recent weeks, Telecom has finally confirmed rumours that have swirled around the industry for well over a month.

It has now publicly stated it is prepared to separate its network business in order to take part in the Government-backed ultra-fast broadband scheme (UFB).

The planned high-speed fibre network creates a natural monopoly and the Government has stipulated any company with a retail arm, such as Telecom, Vodafone and TelstraClear, cannot take a controlling stake in the new network.

Telecom is said to have engaged the Sydney-based corporate advisory team from Goldman Sachs JBWere, headed by Dion Werbeloff.

Werbeloff handled the sale of Yellow Pages for Telecom which netted the company $2.2 billion at the peak of the private equity boom.

Chief executive of the company's network business Chorus, Mark Ratcliffe, said a demerger of the phone giant into a telecommunications service retailer and a network business, the most likely form of separation, would see shareholders holding two Telecom shares receive a single share in each business at the time of the split.

"Having a situation where the Government is choosing to compete against us is not an ideal situation," said Ratcliffe. "It's not an ideal situation for New Zealand because you're going to get overbuild of an existing network and you're going to have the Government as your major competitor and that's not a healthy thing for anybody."

Ratcliffe said as long as it was in the best interests of Telecom shareholders it would "do the right thing".

He is clear, however, that a split of Telecom would not involve the Government buying back network assets.

"Nothing we've heard from them or we've thought about involves them buying back assets. That doesn't seem consistent with their philosophy. I think they want to make sure they've got an investment in something but you shouldn't think about it as the Government buying back."

Industry analysts estimate a demerger could take 12 months and may see Ratcliffe, a Telecom veteran of more than 20 years, at the helm of a publicly listed company.

He has stepped aside from his Chorus role to focus on the company's bid to build the fibre network. Asked how he might neutralise public antipathy towards Telecom developed during its 20 years as a private sector monopoly, Ratcliffe said the vehicle behind the fibre rollout would be known as Chorus.

Other than a scuffle with unions over the signing of Australian-owned Visionstream, with its owner/operator business model, to run part of the technical fleet the Chorus brand is relatively untainted and respected by the industry since its creation more than two years ago.

"We floated the idea of structural separation with the previous Government at the time of operational separation and it wasn't supported at that time, so it's not something that is completely new to our thinking. Maybe the time is now right," said Ratcliffe.

Where the Telecom pie is likely to be cut is still under discussion.

The company already has an operational separation where its retail, wholesale and network businesses trade at arm's length to ensure competitors get fair and equitable access to Telecom's network.

"[The split] might not be exactly where the Chorus versus non-Chorus parts of Telecom are currently split, it might be at some other point, but that's all part of what we hope will be a discussion should we make the shortlist," Ratcliffe said.

He confirmed all existing network assets, including the copper lines, would be part of the new listed Chorus business.

While partnerships could be formed with other companies to fibre up parts of the country, Ratcliffe is clear that Telecom would not consider going down the separation road if it was only picking up a contract for a small section of the work.

Basically, if Telecom are not given the nod to roll out fibre in Auckland, all deals are off.

"We certainly wouldn't go through any form of separation and lose out on the biggest commercial and residential centre in the country," Ratcliffe said.

As part of a break-up Telecom is asking the Government to hit the pause button on some of its current regulation, in particular, those that would "no longer be relevant in a fibre future".

Vector chief executive Simon Mackenzie said it was premature for Telecom to get any relief before a decision was made on UFB participants.

Vector, with around 1000km of fibre already laid around Auckland, has also thrown its hat in the ring with a bid focused on the Auckland region.

Mackenzie is concerned discussion over allowing Telecom leeway in its separation undertakings could eat into the timetable for a decision on who will partner the Government, still expected to be in September.

"These discussions cannot be bilateral between Telecom and Crown Fibre," said Mackenzie. "There is a prescribed process from undertakings and with respect to any regulation on any fibre assets to be built that has to be a transparent and open process with all parties involved."

Mackenzie points to a press release from Telecom late last month in which the company said it needed to have a detailed understanding of the regulatory environment, and this warranted detailed discussion and analysis with the Government.

"We're saying no, you can't go having a one-on-one with the Government because in the first instance with undertakings there is an already set and prescribed process, and with the second one in respect to regulation of fibre and how that will impact, that is a discussion that all parties have to be involved in as opposed to a one-on-one," said Mackenzie.

Despite Telecom's current place in the market, Mackenzie is confident the Government can partner with other players to successfully achieve its fibre ambitions.

In Australia, a recent report by McKinsey and KPMG said the Australian Government could build its fibre network within budget without assets from Telstra tipped in, and Mackenzie said the same situation applied in New Zealand.