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Media reports suggest 2degrees is in the race to buy Orcon.

If 2degrees couldn’t find the $22 million to buy the third chunk of 700 MHz spectrum, it can’t afford Orcon.

In hindsight, the government’s 700 MHz spectrum auction was a great deal. The reserve price for each paired block of spectrum was set at $22 million. Thanks to the rules that meant each of the three carriers could each buy three blocks at the reserve price.

Vodafone and Telecom NZ picked up their full allocation, 2degrees purchased two blocks leaving one on the tablet. This was later sold to Telecom NZ for $83 million.

Which means 2degrees couldn’t find $22 million in  to buy an asset the market prices at $83 million. That’s a return in less than six months of around 270 percent.

Compare this missed opportunity with buying Orcon. The formerly state-owned ISP and phone company is in trouble. It lacks scale in a market where scale matters.

Orcon is essentially bankrupt. Regardless of the price, Orcon needs a serious cash injection to get back in the game. I don’t have access to the numbers, but I suspect it needs considerably more than $22 million.

For what?

Certainly not a quick return of 270 percent.

ISP margins are not high, shareholders are happy if they can manage a 10 percent return on capital.

The conventional thinking says 2degrees needs a broadband and fixed line business so it can offer complete telecommunications packages to, allegedly, lucrative business customers.

That’s not a stupid idea, but nor is it straightforward. Those bundles work for Vodafone and Telecom NZ partly because they give opportunities for cross subsidy and partly because they allow a centralised, single bill. 2degrees would need to find those cross subsidies and splash out on a new billion system. None of this is cheap.

We could wake tomorrow and find 2degrees has acquired Orcon. No doubt there will be calming words from the management about ‘synergies’, cost-savings and unlocking value.

But I’m not convinced. If 2degrees can’t find $22 million to buy $83 million of spectrum, an appreciating asset, it doesn’t make sense to buy into Orcon’s financial black hole.

 

One thought on “If 2degrees can’t afford 700 MHz spectrum, it can’t afford Orcon

  1. After traveling back and forth over the ditch i settled back home. I had been with Orcon only, for 11 yrs. I decided to go Broadband nearly two years ago. I rang Orcon and said i wanted the usual $75 deal going around. Something like 30 gigs, home phone included free local calls etc. They came back with $105 ??? I said ‘ sorry can you repeat that ” !!! They did. I said i will walk to Telecom, go ask your supervisor. Bottom line, i walked and got in bed with Telecom. Been great service eversince, plus i was given a free xtra 10 gigs pm without asking. Orcon should give these sales peeps some leeway to use their smarts. I wont go back evva because i think they are quite happy to lose a long term customer. That i interpret as ” We dont give a **** ”

    Well neither do i Orcon. Russell in BOP

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