Has there ever been a company battling so much uncertainty on as many fronts as Telstra?
The latest implosion in the Telstra share price suggests the market has given up grappling with the implications of myriad internal and external issues Telstra has been confronted with, with not even the near-guarantee of a double-digit yield providing a floor under the price.
Some of the uncertainties were touched on by an apparently somewhat frustrated Telstra’s chief financial officer John Stanhope yesterday.
Telstra doesn’t know whether its proposed $11 billion deal with NBN Co and the government to gradually shut down its fixed-line networks and transfer its customers across to the NBN will eventuate, given the need for parliamentary approval and the unpredictable shape of the current parliament.
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For NBN Co to become a wholesale open-access monopoly there will need to be an override to the Trade Practices Act enacted that enables the deal, which would see Telstra shutting down competitive infrastructure in return for the $11 billion of net present value, and that would potentially create disincentives for any other operator to use or deploy their own broadband infrastructure.
Can the government get that kind of legislation through the Senate before the Greens gain the balance of power next July? Telstra doesn’t know.
Telstra doesn’t know what impact, if any, the government’s deal with the independents to prioritise the roll-out of the NBN in regional areas might have on the deal with NBN Co because NBN Co has yet to work through the implications and Telstra has yet to have that conversation with NBN Co.
A reasonable assumption would be that building more of the network first in high-cost low-density less-affluent regional areas would reduce NBN Co’s early cash flows and adversely affect its own economics, with flow-on effects to the value it would attribute, and be able to afford, to the customers Telstra transfers.
Conversely, Telstra would lose its least-contestable customer base first, albeit the highest cost-to-serve, and the big payments for the biggest and most dense slabs of its customers would be delayed, reducing the net present value of the income stream from NBN Co.
Telstra doesn’t know whether parliament will pass the legislation forcing a form of separation of its retail and wholesale businesses on it.
It may still not know the fate and final form of any of the key elements of the legislative framework that will govern its future until this time next year. Having already experienced more than a year of legislative uncertainty, that’s a dispiriting and destabilising prospect, albeit one not of Telstra’s making.
It also doesn’t know the existing regulatory regime might do to it — or the economics of the NBN and the value of its deal with NBN Co — while it waits for Canberra to put in place the legislative foundations for a new fixed-line future.
Last week the Australian Competition and Consumer Commission issued a draft report and indicative prices for a completely new approach to fixed-line services and the method under which access prices for Telstra’s competitors will be set over the next few years, abandoning the long-standing theoretical approach to pricing for a “building block” approach based on actual historical costs that would significant lower wholesale line rental prices and further damage Telstra’s already weakening fixed line revenues.
If the draft approach is confirmed in the commission’s final report, it might also impact the economics of the NBN and lower the value of Telstra’s customers to NBN Co further. That’s another issue to be analysed and discussed by Telstra and NBN Co.
The legislative and regulatory uncertainties and risks aren’t capable of being controlled by Telstra but add to the already difficult task of trying to manage the group through dramatic changes to the structure of its sector — the implosion in its fixed-line revenue base and intense competition in the exploding wireless broadband segment — while also wrestling with an ambitious and costly attempt to change the group’s culture in anticipation of a post-NBN environment.
It is difficult to imagine a more destructive mix of external and internal challenges and such a broad and substantial range of uncertainties.
The market, still faced with a protracted period of further uncertainty — Stanhope says the group is still “aiming” to put the NBN Co deal to its shareholders by June next year but isn’t certain it will be able to meet that timetable — appears to have almost given up trying to work its way through the complexities, despite the $4 billion to $5 billion of cash flow a year Telstra will continue to generate even with its $1 billion investment in enhanced competitiveness and the internal change program this year.
It is unclear how the spiral of disappointment and fear can be arrested, let alone reversed, given that so much of it is driven by what happens in Canberra rather than within Telstra’s head office.
*This story first appeared on Business Spectator