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A Broker's PreView - Commerce Commission Singing Chorus' Tune

Overview: The Chorus saga was prolonged a further 2 months this week with the Commerce Commission extending the timetable on the final pricing principle (FPP) for the Unbundled Bitstream Access (UBA) and Unbundled Copper Local Loop (UCLL) decision until December this year. The Commerce Commission FPP decision will essentially decide the price that most Kiwis pay for broadband through the old copper network. This is the forth delay in what has been an arduous process for all involved.

Pros: From Chorus’ perspective, the impact of the delay will depend on the price set by the FPP, as well as how the Commerce Commission decides to treat back-dating. If the Commerce Commission follows Appeal Court precedent, then backdating is likely.

If back-dating is enforced, Chorus could be set for a big pay day. The current wholesale broadband price is $34.44. This was reduced from $44.98 in December last year, after the implementation of the Initial Pricing Principle (IPP) decision. If the Commerce Commission upholds their draft FPP this December, then Chorus will be able to charge Retailer Service Providers (RSPs) $38.39 for broadband. Back-dating could see Chorus reimbursed for the difference between the $38.39 they could have been charging over this period and the $34.44 they have been charging.

Complicated Commerce Commission decisions, acronyms and jargon aside, the Chorus story is fairly simple. The Company is a monopoly provider of an essential service by way of its ownership of 90 percent of New Zealand’s copper broadband network, and heavy involvement in the roll-out of the new Ultra Fast Fibre network.

Cons: The degree to which Chorus is a monopoly is up for debate. With new technology, such as WIFI and 4G, chorus’ dominance of New Zealand’s internet connectivity will not last forever. This potential for obsolescence has been put forward as a credible argument as to why Chorus should be able to charge more, as return on investment may be curtailed due to new technology.

Price performance: After the split from Telecom, Chorus traded north of $3 for some time, but subsequently dropped as low as $1.275 during 2013. More favourable decisions have led to a recovery to those $3 levels.

Investment outlook: There are many specifics that will still be up for debate and go beyond the scope of this article. However, it is worth noting that this process has been anything but predictable. The Commerce Commission giveth and the Commerce Commission taketh away.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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