Telstra’s plan to radically reshape itself in a restructuring that could eventually transform the telecommunications sector is on track to be completed by the end of the year.
Its mobile towers are already on the market. Telstra will seek to sell down its ownership of InfraCo Towers valued by the market at between about $4.5 billion and $5 billion – early next year.
It is probable that, over the next few years, it will do something similar with the other infrastructure-based entities, not necessarily selling out of them or relinquishing control but bringing in strategic or institutional investors to both extricate some cash but, more importantly, to get access to their discrete valuations.
It is conceivable that at some point in future Telstras new holding company will essentially be a retail business and a collection of the more active and differentiating elements of its mobile network with, perhaps, strategic investments in the other units.
It may have to sacrifice the benefits of complete ownership in the restructure it will inevitably have to open up third party access to its infrastructure to maximise the value of the new entities but that would be part of the process of unlocking and adding value for shareholders.
Simplification, focus and more efficient capital allocation would be other gains while, for the rest of the sector, gaining access to Telstras infrastructure if it is owned at genuine arms length could generate massive efficiencies and diminished capital requirements. It could transform the telecommunications landscape.
As Telstra has said, the new structure will create options and transparency. It is conceivable that at some point in future Telstras new holding company will essentially be a retail business and a collection of the more active and differentiating elements of its mobile network with, perhaps, strategic investments in the other units.
It is also conceivable indeed it was part of the original conception of Telstra InfraCo that Telstra shareholders (but not the Telstra holding company) will end up owning a large slice of the national broadband network.
In the original deal the Rudd Government forced on Telstra NBN Co was to pay it an income stream for subscribers who were migrated off Telstras fixed line network to the NBN and NBN Co was also committed to paying Telstra an ongoing income stream for access to its ducts, pits, exchanges and fibre and copper loops.
That first stream of NBN payments for subscribers (combined with much smaller payments to Optus) peaked at $2.4 billion last financial year as the NBN was effectively completed and is now falling away rapidly. There is an estimated $1.5 billion left to go between this financial year and 2024.
The second stream the payments for access to Telstra infrastructure amounts to roughly $1 billion a year, payable out to 2046 and possibly beyond.
The dwindling of that first stream makes the concept of a merger of InfraCo and NBN Co possible while the continuation of the second makes it attractive to both Telstra and the federal government, whether the Coalition or Labor.
NBN Co, for the first time, generated positive EBITDA (earnings before interest, tax, depreciation and amortisation) in the December half.
Telstra has been working towards this moment since 2018, when Andy Penn unveiled his T22 strategy.Credit:Eamon Sullivan
That was an historic moment for the NBN. Its cash generation will now swell rapidly as the subscriber payments fall away and, with the network build virtually complete, its capital spending tumbles.
Positive cash generation relieves and will steadily diminish the burden on taxpayers from the roll-out and will also enable NBN Co to self-fund upgrades to the network, which it is now doing, adding value to NBN Co in the process.
It was always contemplated that NBN Co would eventually be privatised once the network was built and the business was generating strong cash flows, with a rigorous process established at the outset for a future sale. At the moment the window for a transaction appears to open up around the middle of this decade.
A transaction which merged InfraCo with NBN Co would internalise the $1 billion a year of payments NBN Co makes to Telstra and give the merged business control of all the infrastructure associated with the NBN.
Telstra the company would not be allowed to own, or have a shareholding of influence, in a combination of NBN Co and InfraCo but its shareholders could. Telstra could use its infrastructure assets and the income stream from NBN Co to create a value-adding exit strategy from government ownership for the NBN.
That would be the Big Bang example of the optionality Telstra is seeking through the restructure the ability to sell down or out of the infrastructure-owning entities through transactions that either release value depressed or unrecognised within the existing corporate structure or add value via the kind of synergistic combination that a merger of InfraCo and NBN Co would produce.
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Stephen is one of Australias most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.