Published on the 26/02/2015 | Written by Donovan Jackson

The abrupt cessation of three directors from the 2degrees board has raised questions about what confidence the company’s private equity shareholders have in the company’s future…

While vaunted as New Zealand’s third mobile operator, 2degrees has struggled to gain traction in those markets which deliver a profit – largely, post-paid and business accounts – while enjoying distracting success in the cutthroat prepaid market.

In Companies Office filings made on February 23, directors Andy Scott, Claudia Mayr-Dobin and ex-CEO Mike Reynolds ceased as directors effective 20 January 2015. All three represented private equity company Communications Venture Partners (CVP), which holds a 27 percent stake in Two Degrees Mobile Limited.

Contacted for comment, CEO Stewart Sherriff referred queries to Mathew Bolland, ‎director of corporate affairs and wholesale. “Well, the filings are there,” Bolland confirmed, “But this is a shareholder matter and not an operational one, so I can’t comment.” He did, however, forward queries to CVP.

Despite contact by phone and text, Andy Scott did not respond to enquiries.

2degrees is in a precarious position financially, having never turned a profit and always been cash flow negative in its six years of operation; the most recent company filing shows a net loss of $35.9 million with a level of cash burn of approximately $1 million a week, and Sheriff recently declined to say when the company might be expected to turn a profit.

Questions have been raised about its viability, most notably by independent telecommunications analyst Paul Budde, and the vigour with which its management is pursuing substantial price cuts in a highly competitive market.

Forsyth Barr senior equity analyst Blair Galpin says it is difficult to pin down what the directors’ cessation means for privately held 2degrees. “Shareholders don’t pull directors when they are happy,” he notes. “At a high level, we know that Spark has been more aggressive in the market particularly with its Skinny brand. 2degrees has also recently launched aggressive new pricing into the market. The combination of these factors will be impacting its cash flows so I could see there being some angst from the private equity holders.

“There was also talk late last year around potential external investment that didn’t pan out. [I wouldn’t be] surprised if there are concerns at the way the market is playing out.”

Ousted founder of 2degrees Tex Edward’s has long campaigned on 2degrees viability in the New Zealand market. His 2013 submissions to the Commerce Commission, made under his investment vehicle KLR, in essence argued that 2degrees cannot compete with Vodafone or Spark owing to these companies’ market dominance. The incumbency of Vodafone (approx. $1500 million of revenues) and Spark (approx. $850 million) means 2degrees (approx. $263.1 million) could be slowly strangled out of the market, thereby leaving open the possibility of a return to duopoly.

A timeframe for when 2degrees anticipates turning years of red ink into a profit, and whether it has a sustainable business at all are questions which investors are bound to be asking.

Notorious for having a go at the regulator, Edwards this time directed his ire elsewhere. “You can’t regulate for management mistakes; people need to understand the cost of capital, $600 million of which came from private equity of CVP, Trilogy, KLR and Tuaropaki, and needs a return. And there is no business case in continually cutting costs to acquire customers that don’t deliver a profit.”

Although still himself a shareholder, Edwards refused to comment on the resignations, citing a shareholder’s agreement which only permits him to speak on regulatory matters. However, he did state that fellow minority Hautaki Trust was factually wrong to suggest that 2degrees is cash flow positive during its 2014 public meeting.

Galpin says of the directors’ cessations – it is unclear if the directors resigned or were pushed – that they are “something interesting and worthwhile watching closely over next couple of months”.