For anybody (and there are plenty out there) who has not followed the ins and outs of the multi-year saga of privatisation and subsequent progress of Australian telecoms giant Telstra, the latest news adds another layer of complexity.
It also highlights Canberra’s brutal approach to its former charge — a business which has earned staggering amounts of revenue for public coffers through its multi-phase privatisation.
On Tuesday, the Australian government announced that Telstra must separate its fixed-line assets from its consumer business or else face severe curbs on its plans to expand mobile services.
Canberra made the decision amid plans to roll out its much-vaunted A$43bn ($37bn) high-speed, national broadband network.
And it is playing hardball with the telecoms behemoth. Brutal or not, the approach has hardly drawn sympathy from commentators, who largely side with widespread perceptions that the Australian telco giant has had a hugely lucrative run in the past decade. As the headline on a comment by the Sydney Morning Herald’s Michael Pascoe runs on Tuesday, “Now for something different: Telstra ripped off“.
If Telstra does not not agree to structural separation, the government will use new laws it has just passed to break up the company and force it to sell off its cable network and 50 per cent stake in cable service Foxtel.
On the consumer level, a structural separation of Telstra’s wholesale and retail arms will deliver a greater range of services at cheaper prices, notes The Australian on Tuesday.
Understandably, though, Telstra has said it is “disappointed” by the government’s “unnecessary” proposal — and so, of course, are investors. Analysts have estimated that the business split could reduce Telstra’s current valuation (of around A$3.25bn as of Monday) by as much as 85 cents a share.
As Bloomberg reports, the stock plunged in response to the announcement by Australian communications minister Stephen Conroy, falling nearly 5.5 per cent on Tueday afternoon – the most in nine months – amid concerns that the phone operator may lose its most profitable operation.
Indeed, as BusinessSpectator’s Stephen Bartholomeusz notes on Tuesday, Conroy “plays a rough game”:
His “invitation” to Telstra to restructure has been made with steel-capped boots on. Either Telstra agrees to structural separation on a “voluntary and cooperative basis” or else.
The “or else” would, if it were any company other than Telstra being threatened, provoke outrage, he adds. However, because it is (the ever-unpopular) Telstra under the gun, “it probably won’t”. Bartholomeusz continues:
Telstra can choose not to accept the government’s invitation, in which case Conroy will impose “strong functional separation” on it, which means separating its network and wholesale functions from its retail businesses and providing its competitors with equivalent prices and terms to those given to its own retail businesses.
Telstra recently estimated the cost of functional separation at between about 4 cents per share and 10 cents per share — about A$500 million to A$1.2 billion — depending on its nature.
If Telstra chooses not to “volunteer”, however, it faces other business hardships than just functional separation, he adds:
In other words, if Telstra doesn’t cooperate, its wireless business will be prevented from competing in the next generation of wireless broadband services. If it does, it may get to both acquire new spectrum and keep its cable and Foxtel interests. It’s an invidious choice Conroy is forcing on Telstra.
The Conroy approach is brutal and not much of a reward for Telstra’s decision to re-make its boardroom and replace its chief executive to demonstrate its willingness to cooperate with the government’s NBN plans. Indeed, the outcome is as bad as anything Conroy could have threatened had the adversarial Donald McGauchie/Sol Trujillo team [previous top management] remained in place.
Having gone down that “placatory route”, however, it is doubtful whether Telstra will challenge the government’s position, says Bartholomeusz. In the end, he concludes, a structural separation controlled by Telstra “is not necessarily a horrendous outcome for Telstra shareholders”:
It would separate its capital-hungry infrastructure from its retail businesses, enabling the retail entity to focus exclusively on winning and retaining customers while the network entity would become a conventional infrastructure businesses selling wholesale access to the entire sector without any complicating conflicts of interest — although there have been studies in the past that have concluded structural separation would lead to a net loss of value.
Related links:
Reforms pave way for Telstra break-up – SMH
Clash of the moguls, James Thomson – BusinessSpectator