KEY POINTS:
Over the years, Telecom's shareholders were well rewarded as the company took full advantage of its position as de facto regulator of the telecommunications industry. They prospered as Telecom employed formidable lobbying and legal haggling to preserve its status far beyond any reasonable expectation. The same could not be said for Telecom's customers. They fumed as the company's ageing equipment creaked. Telecom's approach, rational enough in the circumstances, was to minimise capital expenditure while maximising its returns to shareholders.
That period of shareholder bliss ended last year, of course, when the Government opened Telecom's network to competitors by unbundling the local loop. New Zealand's dismal ranking of 22nd out of the 30 OECD countries for broadband internet uptake had finally exhausted its patience. Competition-inspired infrastructure spending was to be the panacea for a country rated 41st out of 42 high-income nations in telecommunications investment.
Achieving that goal will be no simple matter, however. In the normal course of events, the loss of a line network monopoly offers a company a disincentive, not encouragement, to increase its investment in it. Not only would the Government have to be resolute in pursuing its agenda but Telecom would have to show willingness to operate in a changed environment. Now, with the $2.4 billion sale of its Yellow Pages directories business to a private equity consortium, it faces a significant test.
Telecom could spend this money in a variety of ways. Some could be used to finance the $400 million purchase of Australian network company Powertel, delivering value to its struggling subsidiary AAPT. As much as $347 million could go to retain Telecom's 19.9 per cent stake in Hutchison Telecommunications Australia's 3G business. Additionally, it will look to reduce debt, possibly by about $280 million. On top of all this, many analysts foresee the return of more than $1 billion to shareholders.
If all this were done, there would be little left for capital expenditure. Yet that must be uppermost in Telecom's thinking. In recent years, the relationship between capital expenditure and depreciation has been a telling commentary on the company's shortcomings in this area. Its present annual capital expenditure budget of about $800 million is a shadow of the sum required to deliver New Zealand from the telecommunications dark age.
Telecom has some tough decisions to make before it announces its spending plans on May 3. The $2.4 billion received for the Yellow Pages business was at the upper end of expectations, itself a strong sign of the continued appeal of the printed page, albeit with an online option in this instance. Many Telecom shareholders would, with considerable justification, prefer a withdrawal from Australia, rather than a deeper commitment to remedying an extremely damaging sortie. Certainly, that should not take precedence over investment in the local network.
Nor should the return to shareholders. Not only would that be a further blow to Telecom's long-suffering customers but it would surely attract the attention of the Government. Given the resounding chorus in favour of the forcible opening of Telecom's network, it would not be too fearful of imposing further regulation. It could, for example, demand the reinvestment of a certain percentage of profits. Any such move would be highly unfortunate, particularly in terms of deterring overseas investment. Telecom, armed with its Yellow Pages chest, can put it out of the question. Its oft-repeated excuse that planning laws place severe restrictions on capital expenditure holds little water. This time, Telecom must put its customers, not its shareholders, first.
