26 January 2009
NZX Regulation Decision
TeamTalk Limited
Application for Waiver from NZSX Listing Rule 9.1.1(b)
Background
TeamTalk Limited ("TTK") is a listed on the NZSX market.
TTK''s wholly owned subsidiary, CityLink Limited ("CityLink"), is in the
business of building, owning and operating fibre optic cable infrastructure
and providing broadband services.
The New Zealand Government ("Government") has announced an intention to roll
out ultra-fast broadband to 75% of New Zealanders over ten years ("Project").
The Ministry of Economic Development has released an invitation to
participate in the Project ("Invitation"). The Invitation sets out the basis
on which the Government will enter into formal agreements with "Partners" and
identifies what is referred to as the ''preferred commercial model'' ("Model").
The Government has sought Partnership proposals for each candidate area by 29
January 2009 ("Proposals").
Under the Model, the Crown intends to establish the Crown Fibre Holdings
Company ("CFH") which will hold and manage the Crown''s investment in each
''candidate area'' via a local fibre company ("LFC").
The LFC will be capitalised through the issuance of three share classes:
(a)"A Shares": having an issue price of $1.00 each and which will have voting
rights but will bear no entitlement to ordinary dividends from LFC''s
operating profits, which will be issued to CFH;
(b)"B Shares": having an issue price of $1.00 each and which will have no
voting rights but will carry an entitlement to ordinary dividends from
LFC''s operating profits, which will be issued to the successful Partner;
and
(c)a single "Government Share" which will have no voting rights or dividend
entitlement but will hold veto rights over certain amendments to LFC''s
constitution, which will be issued to the Crown.
The LFC will enter into a procurement agreement with the Partner, under which
the LFC will contract to acquire from the Partner the necessary network
infrastructure ("Communal Infrastructure") and ("End User Infrastructure") as
it is ready for service.
The initial cost of providing the Communal Infrastructure will be met by the
issuance of A Shares to CFH for cash. The number of A Shares to be issued
will be determined on the basis of the proposed cost per premises passed (as
provided for in the Procurement Agreement) adjusted for inflation, multiplied
by the number of premises passed at the relevant stage divided by the the
Issue Price of A Shares adjusted for inflation.
The Partner will bear the cost of infrastructure required to connect end
users to the Communal Infrastructure ("End User Infrastructure"). LFC will
acquire the End User Infrastructure as new users are connected to the
Communal Infrastructure. Consideration for the acquisition of End User
Infrastructure will be way of the issuance of B Shares to the Partner. The
number of B shares to be issued for each end user connected will be
determined by the lesser of the forecasted weighted average cost of
installing End User Infrastructure (as provided for in the relevant
Procurement Agreement) and the actual cost to the Partner of providing the
End User Infrastructure, in either case adjusted for inflation and divided by
the Issue Price adjusted for inflation.
Any costs of developing the Communal Infrastructure or End User
Infrastructure beyond that provided for in the Procurement Agreement will be
payable by the Partner.
The constituting documents of the LFC will require, among other things, that
the LFC provide specified broadband services to those within the candidate
area.
NZSX Listing Rule ("Rule") 9.1.1 restricts an Issuer from entering into any
transaction, or series of linked, or related, transactions, to acquire assets
which have a gross value in excess of 50% of the Average Market
Capitalisation of the Issuer.
TTK has a current Average Market Capitalisation of $48 million.
While the cost, and number, of A and B shares which the Partner may be
required to subscribe for and purchase is currently unknown, if the project
is fully successful LFC could potentially acquire 130,000 new customers over
a ten year period. Based on TTK''s estimates, as provided to NZXR, it is
likely that the aggregate cost, over ten years, of the A Shares and B Shares
to be acquired in consideration for the End User and Communal Infrastructure
will exceed 50% of TTK''s Average Market Capitalisation.
Accordingly, Rule 9.2.1 restricts TTK from entering into arrangements in
respect of the Project prior to obtaining shareholder approval.
Application
TTK has approached NZXR seeking a waiver from Rule 9.1.1(b) so as to enable
it to enter into the Project without first obtaining shareholder approval.
In support of its application, TTK submits that:
For a variety of reasons, including competition from other broadband service
providers and new technology, only a portion of the infrastructure may ever
be built or, if it is built, will be taken up by customers. Accordingly, the
number of shares which TTK may be required to subscribe for could have a
value significantly below 50% of TTK''s Average Market Capitalisation.
CityLink must submit its Proposal to the Crown no later than 29 January 2010.
If the Proposal is conditional on shareholder approval it will be placed at a
significant commercial disadvantage because companies which are not subject
to the Rules will be able to submit unconditional, and hence more attractive
Proposals.
CityLink is in the business of building and selling services over broadband
infrastructure so there is nothing unusual, or out of the ordinary, about a
decision to expand its business in the Wellington area. CityLink has been
doing so since its formation 15 year ago.
This unusual structure arises only because the Crown has agreed to fund the
construction of new infrastructure and to take the very significant
commercial risk that the infrastructure will not be fully utilised. From an
economic perspective, CityLink is only required to acquire and pay for the
infrastructure (by acquiring shares in the LFC) as, and when, the LFC has a
customer and the accompanying revenue stream.
The transaction is akin to a ''long term requirements contract'', under which
CityLink is agreeing to purchase all of its requirements for new
infrastructure in the Wellington region from a particular supplier, at an
agreed price per customer, but its obligation to acquire such infrastructure
arises only when it has a purchaser for it. This would be akin to a rental
car company agreeing to purchase all of its requirements for new cars from a
single manufacturer as and when required for its fleet.
The only aspect of the transaction that brings it within the ambit of Rule
9.1.1 is the obligation of LFC to connect all customers who wish to do so,
which gives rise to a corresponding share purchase obligation. However, the
obligation may, or may not, ever materialize or, if it does, the amount
required from CityLink is at best speculative.
From a shareholder perspective, this is nothing other than a means of
pursuing CityLink''s ordinary business.
The figures provided to NZXR are best estimates which assume broadband
services will be taken up by new customers in line with CityLink''s current
experience. These estimates are subject to a host of factors including the
emergence of competition from other broadband service providers or the
emergence of new technology (such as wireless services). The level of risk is
such that the Crown has determined services providers would not invest unless
that risk was taken by the Crown.
Under the Proposal, CityLink will provide services to the LFC by constructing
the network either itself or with partners. The effect of this, together with
anticipated growth in other aspects of TeamTalk''s business and the gradual
effect of acquiring shares in the LFC, and corresponding revenue streams,
should result in an increase in TeamTalk''s market capitalization. It is
highly likely that in any given year (and almost certainly in the initial
years) the investment by CityLink in shares in the LFC will be less than half
of TeamTalk''s market capitalization. For example:
in the base case submitted to NZXR in the LFC does not even potentially reach
a level which would require shareholder consideration until year 8, at which
point it is likely that TeamTalk''s market capitalization will have increased
to the level that approval would not be required even then if the issue were
considered on a year by year basis; and
the different scenarios provided to NZXR show the difficulty of predicting
with any certainty the level of expenditure that may be required in a project
in which the actual size is unknown.
Rule 9.1.1 was intended to catch transactions which would have the effect of
changing the nature of the issuer''s business or of requiring the immediate
expenditure of large amounts of shareholders funds. That is not the position
here. In this case, CityLink is entering into a long term contract to
purchase assets as, and when, required. This structure is a result of the
Governments'' desire to provide initial funding and then exit the business.
Rules
Rule 9.1.1 provides that:
"An Issuer shall not (subject to Rule 9.1.3) enter into any transaction or
series of linked or related transactions to acquire, sell, lease, exchange,
or otherwise dispose (otherwise than by way of charge) assets of the Issuer
or assets to be held by the Issuer:
which would change the essential nature of the business of the Issuer; or
in respect of which the gross value is in excess of 50% of the Average Market
Capitalisation of the Issuer;
except with the prior approval of an Ordinary Resolution of the Issuer or a
special resolution if that Issuer must obtain approval of the transaction or
transactions by special resolution under section 129 of the Companies Act
1993."
Footnote 3 to Rule 9.1 provides that:
"NZX may waive application of Rule 9.1 where, due to deterioration in the
financial position of the Issuer, the Average Market Capitalisation of the
Issuer has reduced to such an extent that the Rule imposes an unreasonable
restriction on the ability of the Issuer to realise assets."
Rule 1.6 provides that:
"Average Market Capitalisation" means, in relation to any transaction, the
volume weighted average market capitalisation of an Issuer''s Equity
Securities carrying Votes calculated from trades on the NZSX over the 20
Business Days before the earlier of the day the transaction is entered into
or is announced to the market."
Decision
On the basis that the information provided to NZXR is full and accurate in
all material respects, NZXR grants TTK a waiver from Rule 9.1.1 in respect of
the Project.
Reasons
In coming to the decision to grant TTK the waiver in respect of Rule 9.1.1,
NZXR has considered that:
TTK wishes to take advantage of its existing experience and broadband
infrastructure by participating in the opportunity afforded by the Project.
However, given the requirement that Proposals be submitted by 29 January
2010, TTK cannot obtain shareholder approval prior to submitting its
Proposal. The alternative is that any proposal is conditional on subsequent
shareholder approval. NZXR accepts that such a condition may weaken TTK''s
Proposal and that, in this instance, TTK cannot obtain shareholder approval
without prejudicing its Proposal.
The policy behind Rule 9.1.1 is to regulate those transactions which are
major decisions for an Issuer, or which may change the essential nature of
the Issuer''s business. The development of broadband infrastructure and
support services is wholly within CityLink''s core areas of expertise and
experience, rather than being a transaction that changes the essential nature
of TTK''s business.
As the Proposal will be of a nature wholly within the ordinary course of
TTK''s business, to require shareholder approval would impose a significant
impediment on TTK''s ability to carry out its business and take advantage of
this opportunity. In the absence of shareholder approval affording any
additional benefit to shareholders, NZXR is satisfied that the circumstances
are such that a waiver from the Rule should be granted.
While the Project may theoretically result in TTK, via CityLink, being
required to obtain assets having a value in excess of 50% of its market
capitalisation, it is only through the structure of the Invitation, namely an
asset purchase, that the Project falls within the ambit of the Rules.
Furthermore NZXR notes that it is possible that this threshold may never be
exceeded.
Shareholders have been advised of TTK''s intention to participate in the
Project. Accordingly, shareholders have had an opportunity to consider TTK''s
intention to participate in the Project and to make investment decisions as a
result of that information.
There is precedent for this decision, most recently in the AIR decision dated
23 July 2009.
Confidentiality
TTK has requested that the waiver be treated confidentially until such time
as an announcement has been made to the market regarding TTK''s proposal. NZXR
grants TTK''s request in accordance with Rules 1.11.2 and 1.11.4 and the
footnotes to those Rules.
ENDS.
End CA:00190761 For:TTK Type:WAV/RULE Time:2010-02-02:09:06:49