CEO Paul Reynolds wants to split Telecom New Zealand to
allow the independent infrastructure company to bid for state
broadband funds. Shareholders and government will consider his
plans in October
Paul Reynolds: We'll be the first telco in the world to
voluntarily separate. We'd be on the road by early 2011 with
separate management teams
Paul Reynolds, the CEO of Telecom New Zealand, is proposing to
break the company into two - an infrastructure company and a
services company that would own no infrastructure.
If he succeeds in his project, he will be a pioneer - because
he means more than operational separation, which Telecom NZ and
a number of others already offer - but a complete division into
two independently owned companies.
"We'll be the first telco in the world to voluntarily
separate," he tells Global Telecoms Business.
And the move, to be formally proposed to the New Zealand
government as regulator and holder of a controlling share by
the end of October 2010, will benefit shareholders by as much
as 30%, he says.
"The Telecom New Zealand share price has been depressed," he
says. "There would probably be a 30% rerating" if the demerger
plan went ahead.
A deal would need not only the government's support, but also
that of 75% of shareholders. The result could be two
independent companies by July 2011, says Reynolds. "We'd be on
the road by early 2011 with separate management teams."
This would be easier in New Zealand than in many places, as the
company already has a quasi-independent infrastructure
division, Chorus, which is responsible for the fixed network
used by Telecom NZ's own retail operations as well as by that
of its competitors, including subsidiaries of Telstra -
Australia's incumbent operator, which has a significant
business in New Zealand - and Vodafone.
In the proposals that Reynolds and his colleagues are putting
together, shareholders would receive one share in each of the
two new companies for each share in the existing business.
"They would then be completely separate legal entities," says
The spur for this move is a project by the New Zealand
government to invest in fibre-to-the-home networks. The
government has set up a company, Crown Fibre Holdings, to
invest NZ $1.5 billion (not quite US $1.1 billion) in a
public-private partnership to fund an open-access ultra-fast
broadband network, with the aim of getting service to 75% of
the population by the end of 2019.
CFH defines ultra-fast broadband as 100 megabits a second
downstream and 50 megabits upstream. It has invited operators
to participate in this project, "but there will be no
taxpayers' money to anyone with a retail operation", says
That means Telecom NZ, even though it already has a national
network, cannot bid for any of the CFH money unless it can
separate retail operations from the infrastructure business.
The rule also applies to other operators in the New Zealand
market, he points out, including Telstra and Vodafone.
The timetable is tight. Crown Fibre Holdings has already
received expressions of interest from 33 operators and,
according to chairman Simon Allen, it plans to recommend the
"preferred investment partners" to the government in October
2010, "with the initiative commencing before the end of the
year", he said in July. Allen is a former ABN Amro banker who
later chaired the New Zealand stock exchange.
"We've put our proposals to the government in order to get this
money," says Reynolds. But for that, the infrastructure company
would have to be an independent legal entity from the retail
operation. "We could serve the whole industry if we demerged,"
A deal would be good for Telecom NZ and for the country, he
says. "We're a small country at the edge of the earth. The cost
of getting broadband is more than in other countries. We could
have a very efficient deployment, with our existing resources
and with the new fibre."
The new companies, if the government and the shareholders agree
with his proposals, would both be listed on the New Zealand
stock exchange, and both would probably be protected against
foreign takeover by a so-called "Kiwi share", controlled by the
Reynolds is clearly excited by the proposal, which - though he
didn't say so - can be seen as a logical progression not only
from the creation of Chorus but also from BT's earlier creation
of Openreach as its local loop infrastructure provider in the
UK a few years before.
BT negotiated the formation of Openreach - in operation from
the start of 2006 - as a quasi-independent business that would
work equally for all UK retail providers, including its own BT
Openreach mark two
It's no coincidence that Reynolds was CEO of BT Wholesale, out
of which Openreach was created, until the middle 2007, when he
was recruited by Telecom NZ. Chorus, in some senses, is
Openreach mark two. Though there are more rules: 200 pages for
Chorus compared with just 60 for Openreach, he grumbles, "and
no commitment to take regulation away. In the UK we got retail
[GTB interviewed Reynolds on 21CN in early 2006
Reynolds wrote for GTB on his new task in New Zealand the
Reynolds won a personal award in the Global Telecoms Business
Innovation Awards of 2008 for the work he had done at BT and
had started to do at Telecom New Zealand. See
But full separation, as he is planning in New Zealand, is very
different from the managed functional separation that led to
the creation of Openreach in the UK and Chorus at the other
side of the planet. When he arrived in New Zealand in 2007 "the
country had switched from one of the least regulated to one of
he most regulated markets in the world, pretty much overnight",
At the same time the government wanted Telecom NZ to invest
heavily in broadband, from a position in which, he admits,
broadband was poor. "High capex was required."
And, he adds, the company ran a CDMA mobile network that was
"out of date and losing market share." That's even though it is
a 3G network - that is, EVDO. It is closing down on November 30
2010. In its place the company has switched to the GSM family,
to build a new 3G network with HSPA.
That's not been comfortable: launched in the middle of 2009,
the HSPA network suffered a number of crashes six months later.
CTO Frank Mount resigned after the last, in February 2010.
But now the peak speed of 21 megabits is available "to where
97% of New Zealanders live and work", says Reynolds. And the
company has built fibre to the node to serve "60% of the
country", he adds. "People are getting 17 megabits where the
cabinets are installed. The infrastructure build has been
Fibre and a new mobile network pushed capex up for a few years,
something Reynolds warned investors about at his first
conference for them in 2008. "We told them of our five-year
plan, and said that earnings were going to decline." Regulated
prices were going to fall, capex had to double and ebitda was
going to decline.
"We rewarded investors with a fixed dividend of 24 cents a
share," says Reynolds. At the current share price - which has
hovered between NZ $2 and $3 for the past few years - that's
around 10%. "The shareholders have been pretty good about it,
to be honest," he adds, though the price is well below the $5
level of mid-2007. "We've had strong investor support," he
Meanwhile he's been wrestling with the consequences of the
recession, and - like telecoms CEOs the world over - struggling
to reduce costs, "and all the issues that telcos have to face,
including no new revenue in the market and none forecast for
Now, "there is a huge focus on costs", he says: cutting costs,
to be accurate. "We've taken $300 million out of the cost base
this year alone."
Much of this has been achieved by improving staff relations and
reducing truck rolls, "so we get it right first time, and don't
do abortive visits".
According to Reynolds, staff motivation "is up 20%", thanks to
"a massive focus on communications and approachability", he
says: "We're communicating like mad."
Reynolds did a similar job at BT around five years ago, when
the company was planning its all-IP network, the so-called 21st
century network. Then he spent months hiking round just about
every site in the company, promoting the idea of the project
and enthusing the staff.
In New Zealand, "the mantra is one of keeping customers at the
heart", he says. Previously the focus "was more on financial
But at the same time, extraordinarily, Telecom NZ's staff
conditions have been tough. Wages have been frozen, around 200
senior and middle managers have been fired, and field engineers
have been made self-employed.
He does not miss the managers, describing the approach as
"hard-nosed", to rebuild the business as it would have been "if
we had built it from scratch". And the result? "Once you make
the change, the business runs more smoothly because there are
fewer people in the way."
Tools and trucks
The field engineers now own their own tools and trucks and
"they are paid by the job done", says Reynolds, so there is an
incentive to get the job right first time. If there's a fault
within a month of a visit, "they have to fix it for free", he
"The guys can control what they earn. They previously got paid
for turning up for work. Now if they work twice as hard, they
are paid twice as much." Some work for six days a week until
9pm, others "do enough work to allow them to finish by
Wednesday", he adds.
There was some resistance from some staff, "and some guys
didn't want to work for themselves, but their mates did, so one
guy can employ 10 of his mates. We found a way through." As a
result "for the business, our costs are less", says Reynolds.
This, and other measures, mean that Telecom NZ is in a much
healthier state. On August 20 2010 the company announced that
earnings had stabilised after two years of decline. Free cash
flow grew by 28% to NZ $128 million, the first growth since
what Reynolds still calls "the regulatory shock of 2006", when
separation was first mooted. "Capex and earnings have
stabilised," he says.
Now, he has his eyes on the further growth possibilities if the
company is split into two, with one part - the infrastructure
company - eligible for some of that $1.5 billion the government
But before then there are laws to be passed and shareholders to
be consulted. Assuming it happens, which part would Reynolds be
interested in staying with? "It's too soon to say that," he
retorts. "I'm building the management teams for the new
companies. I'm totally focused on getting the right deal for
It will be a challenge, he admits: "There is no more complex
job anywhere. No incumbent telco has undergone such rapid
change. That's kept me on my toes." GTB
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