Telstra sniffs wind blowing across the turbulent Tasman
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Malcolm Maiden
April 14, 2007
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* Telecom NZ responds to Government meddling with split
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TELECOM New Zealand is that country's Telstra: a vertically integrated former monopoly that dominates the market, with a 65 per cent share of landline calls, a 50 per cent share of mobiles, and control over access to 90 per cent of households. And yesterday it did something that even a year ago would have been considered unthinkable: it announced it was prepared to dismantle its empire, by selling its copper-wire network.
Here, Telstra has steadfastly argued that its integrated coverage of networks, wholesaling and retailing is its greatest strength. The group has fought attempts to break the structure down, although it is now implementing a diluted form of operational (as opposed to actual) separation of its big divisions, at the behest of the Government, which forced the change as a political quid pro quo for last year's final T3 privatisation share sale.
But if vertical integration is so valuable, why is TCNZ offering to sell it off? And does the move have any portents for the future structure of the telecommunications industry here?
The answer to the first question is that TCNZ is offering to sell its network because the alternatives are even worse, and because the market has already repriced the group as if the network is gone. The New Zealand Government signalled last May that it was going to force the disaggregation of the telco, in order to create the best possible competitive climate for the development of broadband. It has not shifted course, and TCNZ's market value has been cut to reflect that reality. The shares fell from close to $5 before last May's announcement to a low of $3.21 in August. They have recovered and closed at $4.17 yesterday, but it represents a value loss of about $1.3 billion for the group.
After sniffing the pungent political breeze, TCNZ first proposed that it continue to own everything, but structurally separate it in a corporate sense into two units, one holding and running the copper-wire network, and one running the retail and wholesale businesses. But this was not good enough for the NZ Government, which earlier this month announced a plan to break the telco into three units — the copper-wire network, the wholesale business and the retail business — each with separate budgets and staff, but all reporting to TCNZ's board.
TCNZ's new offer argues that this is a highly artificial arrangement, and one that creates layers of bureaucracy. Better, TCNZ argues, for it to actually offload its network instead of virtually doing so. In return, it wants to be paid for the assets, and to be left alone to run its wholesale and retail businesses together, free of heavy government regulation and interference.
The group is betting, in effect, that from its position of market strength it can still compete very effectively, buying space on the hived-off network as its competitors do for landline telephony and landline-based broadband services, and, probably, accessing a stand-alone fibre broadband network later in the same way, alongside its competitors.
Here, the situation is different. Telstra has fought to keep its foot on the network, and the privatisation of the company with its network included has undermined attempts at structural separation. Crucially, until this year in Australia, there was no political will to do what the New Zealand Government has done: force structural change. The market recognises this, and rewards Telstra for the competitive stranglehold it enjoys: its shares are trading at over 17 times expected earnings, way above the multiple of just over 11 times accorded to TCNZ.
That is not to say that Telstra will continue to enjoy unchallenged vertical integration. Labor's plan for a government-private-sector national fibre broadband joint venture challenges the paradigm, because the fibre network will supersede copper wire as Australia's main communications network, and on the Labor blueprint, Telstra will own only half of it at best.
The Howard Government's response to Labor's plan might also threaten to weaken Telstra's grip. Telstra's share price has actually been rising in recent weeks on speculation that the reverse will happen, with the Government panicking into a sweetheart deal with Telstra for a fibre roll-out that maintains Telstra's control of infrastructure. The risk — not recognised in Telstra's share price yet — is that cooler heads will prevail, and the Government will respond to Labor by proposing a network that is even more broadly owned than the one Labor proposes.
Were that to occur, Telstra shareholders would face the traumatic share price dive that TCNZ shareholders endured last year.
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