PAUL MCBETH: Spark’s divisions and NZ Inc

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. He has been a Spark mobile and broadband customer since 2021.

Spark New Zealand finally got down to the nuts and bolts of its back-to-basics strategy outlined last year in separating its broadband and mobile-backed connectivity business and the fresher sounding digital services arm, spanning its cloud and IT operations.

Armchair critics with no skin in the game such as yours truly might well bemoan how long it’s taken the telco to rediscover where its mojo resides but, to be fair, unpicking a highly complex and integrated business generating billions in revenue and employing thousands of people isn’t as simple as snapping your fingers.

The denizens in the Beehive could do well by taking notice.

Because Spark’s worker bees have long been burning the midnight oil to get to the point where an operational – and potential structural – separation can happen, selling all manner of units that don’t quite fit into the core connectivity or core-adjacent digital arms.

Jarden’s slightly stressed investment bankers will probably appreciate the extra work that’s been done as they try to find a buyer for the IT services division that hasn’t quite lived up to the integrated dreams of successive leadership teams.

It might well seem like Spark’s selling at a low ebb in the market. Margins for the cloud, service management and procurement arms of 47.5%, 73.5% and 5.5% in the six months ended Dec 31 were down from 65.1%, 86.8% and 7.1% two years earlier.

A potential buyer is bound to jump on those historical points, just as much as the telco’s negotiators will point to economic indicators pointing to the eventual upswing in the economy that will come with some cream for whoever owns the assets.

Nobody said it was easy

As anyone who’s gone through a deal negotiation can attest, that just comes with the territory – even if the only real beneficiaries seem to be the army of lawyers marking up a legion of changes to sale and purchase agreements.

And there’s no doubt that the separation of Spark’s connectivity and digital services arms creates much easier businesses to understand than the previously unwieldy collection of divisions that seemed to be a technology conglomerate without the portfolio management structure.

On paper, each of those entries stacked up, but the sum of the parts often seemed to threaten the same kind of implosion that beset Fletcher Building.  

Importantly, managing director Jolie Hodson made clear that the division means Spark can allocate the appropriate level of capital and resourcing for those separate arms – something that was muddied under its previous guise, where the competing demands of shareholders wanting healthy dividends were at odds with the cash injections needed to deliver on the growth objectives.

There’s nothing wrong with relearning that you can’t be everything to everyone, and Spark’s new tagline of connecting New Zealanders when and where it matters seems more aligned with what its owners want than the mission statement of yesteryear to help all of New Zealand win big in a digital world.

Perhaps another lesson that politicians with one eye on the November election might want to consider.

I was just guessing at numbers and figures

Scoff all you want at those high-level goals and the dollars spent on brand and marketing types, but they really do matter when trying to rally the troops around a new culture and direction – even if it seemed like a glaringly obvious one.

Because the current situation hasn’t been tenable for a couple of years.

We might have all thought the sale of a controlling interest in the data centres business last year might’ve alleviated some of those concerns, but the rally in Spark’s share price was short-lived and it spiralled back to a 15-year low of $1.775 in late June.

Sure, it’s clawed back some of those losses in recent weeks, but at Friday’s closing price of $1.92, the telco’s market capitalisation of $3.63 billion is embarrassingly less than its former network stablemate Chorus at $4.09 billion.

At the time of demerger back in 2011, Grant Samuel estimated Chorus’s market cap to be worth between $1.1 billion and $1.8 billion to the remaining Telecom business – now Spark – at $3.3 billion-to-$4.5 billion.

Ouch.

Puzzling the puzzles apart

A canny local rival in One New Zealand and a hungry low-cost third player in 2degrees hasn’t helped matters.

Still, Spark has consistently avoided getting into a price war over the years, typically preserving margin even when new entrants seek to undercut the incumbents. In the 2010s, Spark shied away from following a flood of internet service providers offering cut-throat prices when a newly listed Chorus didn’t realise how much it benefited from the pricing formula used in a vertically integrated Telecom.

Upcoming price hikes and a laser focus on cutting costs helped it reaffirm earnings guidance, all of which will be revealed on Aug 20 when the telco releases its annual result.

But questions still remain about who will continue to helm the good ship Spark. Chair Justine Smyth pledged to step down before the annual meeting in November, but we’re still waiting to hear more about that succession plan and whether it involves last year’s boardroom newcomers Lindsay Wright, Vince Hawksworth and Tarek Robbiati.

Likewise, Hodson’s tenure inevitably remains an open question having presided over similar slides from peak-to-trough as Theresa Gattung and Paul Reynolds, although the newish smell of her leadership team might mean that will be pushed out to a later date to preserve institutional knowledge.

In saying that, the signs are promising for an upswing, if not necessarily a return to the days of yore, when Telecom ruled the roost.

Spark’s identity issues reflect much the same of the broader NZ Inc, in that structural change is needed and we can’t just keep borrowing money to keep everybody happy with juiced up dividends.

Running in circles

We might not have policymakers ready to grapple meaningfully with some of the bigger questions facing the nation about more closely aligning our tax base with what we’re happy to spend on collective services, but we do have an economy dragging itself out of the abyss.

While much was made of Aussie investment bank Barrenjoey’s very public raid of local investment house Jarden this past week, people surprisingly played down the vote of confidence it is for New Zealand.

Investment banking is not a sector known for taking on charity cases, nor chasing single-digit growth, and the deepening pools of domestic capital locked in our KiwiSaver funds are just begging for an aggressive player to think up creative ways to put it to work.

Likewise, the daily headlines of New Zealand’s cost-of-living crisis belie leading indicators pointing to those nascent green shoots we dare not speak of for fear of stamping them out.

Monthly jobs figures continue to show modest growth and household and business confidence surveys have clawed their way back to where there are more optimists on the economic outlook than there are pessimists, even in a powder keg of geopolitical environment just itching for a spark.

The paring back of some of New Zealand’s famed red tape has undoubtedly freed some sectors and regions with a bit more wind in their sails, even if the prevailing narrative is more ho-hum on the streets of Auckland and Wellington.

In much the same way, the removal of complexity that Spark’s embarking on – and that Fletcher’s been travelling – is just the tonic for these times.

Sometimes you just have to go back to the start.

Watch Paul McBeth and Oliver Mander discuss the Spark strategic review here:

Image from Curious News.