Analysts advise that Telstra may get $6 billion if it has to split

According to analysts, Telstra, the largest telecommunications company in Australia could stand to get around $6 billion from the government if it agrees to sell its fixed assets.

On October 5th a group of analysts led by Mark Blackwell wrote a note to clients advising that the costs of the separation would be outweighed by the payment made by the government, would allow the company to focus its efforts on the retail part of its business that sell services and would allow Telstra to avoid any sanctions by the government for it not cooperating. In a move that he said would promote increased competition and would benefit consumers the communications minister Stephen Conroy recently called for the separation of the company.

If Telstra, which is currently the owner of the only fixed line network in Australia, doesn’t agree to get rid of its copper wire loop it could face it could face restrictions on expanding its mobile service network. The options for the company currently include helping the government to create a single fiber platform throughout the country by moving its assets to the proposed $43 billion National Broadband Network.

In a report Blackwell from Morgan Stanley wrote “It is clear to us that the NBN is likely to be a commercial failure without Telstra’s support. As a result, Telstra is in a strong position to negotiate a payment for the strategic value of its fixed-line networks.”

The “overweight” rating of the Telstra stock was maintained by Blackwell even after a drop of 15 percent for the year leaving the company’s share value at $3.24, which compares to an overall increase in the S&P/ASX 200 index of 23 percent.

By the end of the year Telstra must make a decision on the structure of its company. Creating a company that owns pipes, ducts and trenches that allow it to operate along with the copper wire network itself will be one of its options.

According to Morgan Stanley the company could stand to save itself around $2 billion on the cost of yearly maintenance on the platform if it agrees to split, which compared to the amount paid by its competitors to use broadband and phone services over its network is more than double.

Blackwell wrote “On our analysis, $6 billion would be enough to outweigh the negatives of separation, which seems achievable. This might not quite be the $20 billion book value of the fixed-line assets, but would provide a substantial cash cushion to the final impact of NBN on Telstra.”

Source – Bloomberg