It is odd that in devoting a whole column to the problems of Telstra, especially the future of Foxtel, The Australian Financial Review’s Chanticleer columnist this morning never mentioned how Foxtel’s financial and subscriber performance deteriorated in 2016.

“Negativity towards Telstra’s shares is not being helped by a growing frustration among fund managers about the way in which the company is dealing with its problematic cable TV joint venture, Foxtel,” Tony Boyd wrote.

“The market wants Telstra and its partner in the business, News Corp, to get a deal done that finally resolves the long-term ownership question and allows each company to pursue separate video and content strategies.

“News Corp wants control of Telstra’s 50 per cent shareholding in Foxtel, but for some mysterious reason a transaction that has been talked about for several years cannot be completed.

“Telstra shareholders are concerned that a failure to exit Foxtel will result in a repeat of Telstra’s experience with the Yellow Pages business directory, also known as Sensis.”

Boyd failed to mention that News Corp’s second biggest shareholder in Perpetual wants to see the Murdoch clan company split with the underperforming print and pay TV businesses hived off (not added to). In any shareholder vote, Perpetual holds the whip hand with its 12% stake because the Murdochs will not be able to vote their 39.1% holding. Several US investors and analysts want to see something similar — with the real estate websites, REA and Move, removed from the weak print and pay TV operations of News.

And then there is the weak operational performance of Foxtel in 2016, which had a big write-down — the second in three years. A reading of the News Corp fourth-quarter report, or the more detailed filing with the US Securities and Exchange Commission, would have revealed that Foxtel suffered a fall in subscriber numbers in the six months to December of around 100,000 (to 2.82 million, a figure in the Telstra half-year report). That was down from “more than 2.9 million” at June 30. A look at both News Corp reports would have shown that the value of the 50% stake in Foxtel was impaired by US$227 (nearly A$300 million), that Foxtel abandoned its interim dividend payments to both Telstra and News Corp (the previous one was US$25 million). Foxtel’s churn rose to a very high 15.5% (that is, it had to replace 15.6% of the roughly 2.9 million subscribers at June 30, or more than 452,000).

Foxtel is already heading down the Sensis path and there is little Telstra can do because News Corp is, in effect, the dominant 50% partner. If News buys Telstra out of its share of Foxtel, it will also include the shareholder loan of more than US$400 million, plus benefits to Telstra of the Fox Sports content supply agreements and those held by other associates of News and the Murdochs in 21st Century Fox. News Corp will also have to make sure Telstra remains attached to Foxtel because its Telstra Now product is the single largest supplier of new Foxtel subscribers at the moment (88,000 added in the December half year and some 600,000 devices, many with Foxtel subscriptions). Telstra is now more important to Foxtel’s future than Foxtel and News Corp are to Telstra’s. — Glenn Dyer

Peter Fray

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