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Post Market Wrap | Spark New Zealand establish separate subsidiary to own 1263 mobile phone tower assets

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Spark TowerCo to assume financial responsibility for 10-year future infrastructure build programme  
  • Spark New Zealand to focus on network and spectrum services and other active operating assets that drive market competitiveness 
  • Spark TowerCo separation optimises Spark capital structure and supports long term shareholder value accretion.

Spark New Zealand Limited (‘Spark‘ or the ‘Group‘), formerly Telecom New Zealand, is the country’s largest telecommunications and digital services provider, providing mobile and broadband services across New Zealand. Spark employs 5000 people, servicing consumers, business and government, through 24 regional business hubs and 67 retail stores. Spark’s comprehensive service range covers mobile, broadband, cloud and digital services as well as entertainment. The Company’s infrastructure supports 2.4 million mobile connections and reaches 98 percent of New Zealanders through 1500 mobile sites and 18 data centres. 

Spark TowerCo  

Spark New Zealand has appointed Forsyth Barr and Jarden to undertake an engagement process to assess the appetite for institutional investors to subscribe capital to its infrastructure subsidiary, Spark TowerCo.    

This follows a detailed review of Spark’s capital-intensive future infrastructure needs. The review also focused on the Group’s existing infrastructure portfolio, comprising 1500 passive mobile tower assets. Spark has an ambitious infrastructure build programme ahead to support New Zealand’s increasing data needs and new technologies like 5G, and ultimately 6G. This future build programme will require many smaller sites, closer to the end customer, and greater overall densification. Spark have concluded that infrastructure assets like mobile phone towers do not provide a competitive advantage in the telecommunications business. However, a specialist infrastructure focus on passive mobile phone tower assets does support ongoing service innovation, and efficiency, by reducing costs and increasing speed to market for these infrastructure build programmes.  

The issue for Spark is how to finance this infrastructure build programme in the most capital-efficient way.

Spark consider the optimal capital solution is to hive off 1263 of its 1500 mobile phone towers into the subsidiary, Spark TowerCo. This infrastructure owner subsidiary has natural appeal to risk-averse investors with a focus on critical infrastructure assets that generate dependable, recurrent, long term cash flows. Mobile phone towers are ideally suited to investors seeking capital stable returns from privileged assets under long dated contracts with low credit risk counterparties such as Spark. 

A key outcome for Spark shareholders is that the substantial investment necessary to modernise its mobile network and improve mobile coverage will be taken up by income-conscious investors who have an appetite for these passive, infrastructure assets. This enables Spark shareholders to optimise their capital returns by focusing on active assets that drive competitiveness and deliver higher margins. These assets are the core network and radio equipment assets that sit on the phone towers and offer differential service levels to that provided by Spark’s competitors, such as Vodaphone.   

The Spark TowerCo proposal is similar to the Telstra InfraCo Towers proposal announced several weeks ago. InfraCo Towers will own and operate Telstra’s mobile phone tower assets. The investor demand and resultant market valuations for these Telstra assets should be a useful guide for prospective Spark TowerCo investors.

Image: File

Looking Ahead 

Like Telstra, Spark understand the fundamental investment principle that a business doesn’t need to own an asset, in order to exploit it. Separating capital intensive, low risk assets into a separately owned vehicle, with exclusive ‘right of use’ provisions, enhances existing Spark shareholder returns by optimising the use of equity capital. 

Spark New Zealand has given Spark TowerCo a 10-year commitment to a comprehensive new tower site build out programme. This is an equally positive outcome for Spark New Zealand shareholders, because it relieves Spark shareholders of equity dilution by not having to contribute substantial fresh capital to passive assets that cannot deliver the superior returns on equity derived from operating assets.

Spark understands that the future is digital as it experiences strong demand from NZ businesses and consumers seeking to digitise and transform their telecommunication needs. This trend is driving demand for Spark’s infrastructure assets. 

The ability for Spark to use and operate these infrastructure assets without incurring a substantial capital expenditure burden is positive for Spark shareholder value accretion over the long term.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.

Michael Kodari is one of the world's most consistent, top performing investor. A philanthropist and one of the prominent experts of the financial markets, he has been referred to as ‘the brightest 21st century entrepreneur in wealth management' by CNBC Asia and featured on Forbes. Featured on TV as the "Money Expert", on the weekly Sunday program "Elevator Pitch", he is recognised internationally by governments as he was the guest of honour for the event "Inside China's Future", chosen by the Chinese government from the funds management industry, attended by industry leaders, when they arrived in Sydney Australia, on April 2014. Michael and George Soros were the only two financiers in the world invited and chosen by the Chinese government to provide advice, and their expertise on Chinese government asset allocation offshore. With a strong background in funds management and stockbroking, Michael has worked with some of the most successful investors and consulted to leading financial institutions. He was the youngest person ever to appear on the expert panel for Fox, Sky News Business Channel at the age of 25 where he demonstrated his skillset across a 3 year period forming the most consistent track record and getting all his predictions right over that period. Michael writes for key financial publications, is regularly interviewed by various media and conducts conferences around the world.

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Business

Management shake up at under fire Qantas

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There’s been a management shake up at Australia’s flag carrier airline Qantas, which has come under fire for cancellations and delays

Jetstar CEO and longtime Qantas executive Gareth Evans has resigned.

He was touted as a potential replacement for controversial Qantas CEO Alan Joyce.

Gareth Evans has been with Qantas for 23 years.

He has been chief of Jetstar since 2017, but has worked across the group and has now “decided this is the right moment to move on”.

This comes as the aviation grapples with the higher fuel prices and staffing issues at airports that are affecting much of the industry globally.

Strong demand

Qantas has also updated the market, saying it’s on track to record second half earnings of just over 500 million dollars.

Underlying profit is set to return in FY23, while debt levels are now well below pre-pandemic levels.

Qantas says this is due to continued strong domestic and international travel demand.

Qantas has come under fire for long delays and cancellations
Qantas has come under fire for long delays and cancellations

After peaking at more than $6.4bn at the height of the pandemic, net debt is expected to fall to around $4bn by June 30, an improvement of around $1.5bn in the past six months.

The airline has come under sustained pressure, with many passengers complaining about long queues, cancellations and delays.

Qantas is calling for patience ahead of the winter school break rush as it hires more staff to manage increased demand at airports.

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Business

Nike to fully exit Russia

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U.S. sportswear maker Nike is making a full exit from Russia, three months after suspending its operations there, the company said in an emailed statement Thursday

The sportswear giant had said back in March that it would suspend operations at all the stores it owns or operates there.

On Thursday (June 23) the firm said it would leave the country altogether.

In a statement, Nike said it would scale down over the coming months.

The move is largely symbolic for the company, which gets less than 1% of its revenue from Russia and Ukraine combined.

It says any stores that are still open there are run by independent partners.

In May, Russian media reported that Nike had not renewed agreements with Inventive Retail Group, its largest franchisee there.

Now the full exit lputs Nike in line with other major western brands such as McDonald’s and Google.

Foreign companies seeking to leave face the prospect of new laws being passed that will allow Moscow to seize assets and impose criminal penalties.

That has prompted some businesses to accelerate their departure plans.

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Business

U.S. orders vape company Juul to cease sales

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Juul has been an industry leader in the vaping sphere since its establishment in 2015, controlling 75 per cent of America’s market by its third year of operations.

This is just the latest crackdown on the Tabacco industry by the Biden administration, all part of a sweeping effort to regulate the sector after years of delay.

The White House has also announced a rule to establish a maximum level of nicotine in tobacco products in an attempt to make them less addictive.

After a nearly two-year-long review, the FDA said Juul submitted insufficient and conflicting data to show that its e-cigarettes met public health standards.

The regulator also said the findings raised “significant questions,” including whether potentially harmful chemicals could leach out of Juul pods.

The decision potentially deals a fatal blow to the once high-flying San Francisco company.

Juul did not immediately respond to a Reuters request for comment.

The FDA had to judge whether Juul’s products, which have been sold for years without being officially authorized by the agency, were effective in getting smokers to quit and, if so, whether the benefits to smokers outweighed the potential health risks to new e-cigarette users, including teenagers.

“They prey on children.”

Democratic Senator Dick Durbin hailed the decision by the FDA on Thursday, but said “they’re in for a legal battle for sure.”

Earlier this week, the Biden administration said it also plans to propose a rule establishing a maximum nicotine level in cigarettes and other tobacco products to make them less addictive.

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