Veteran Telstra shareholder blames Optus for sinking mobile margins

Long-time Telstra shareholder Anton Tagliaferro has blamed rival Optus for creating unsustainably low mobile prices that have dragged down the profit margins of the entire industry.

Mr Tagliaferro's fund management firm Investors Mutual owns about 1 per cent - or 100 million shares - in Telstra after increasing its stake over the last few weeks. He said selling half of the telco giant's mobile infrastructure division and a less aggressive mobile pricing market could shore up Telstra's 16¢ dividend for investors.

Investors Mutual's Anton Tagliaferro.Credit: Dominic Lorrimer

"With this strategy of aggressively discounting pricing to gain market share...[Optus] were hoping that the increase in market share would offset the drop in prices," Mr Tagliaferro said. "But what I think Optus miscalculated was the fact that Telstra also reduced their prices...which meant that Telstra didn't lose the market share Optus were hoping but it also impacted the profitability of all the mobile operators."

According to Optus’ half year results to September 30, total revenue fell 8 per cent to $4.06 billion. Telstra’s total income for full year dropped 6 per cent to $26.2 billion.

The 2019-2020 Communications market report shows mobile prices fell 17 per cent year on year.

"Mobile rates in Australia have fallen to the level of places like India and Pakistan, because of the aggressiveness of Optus' pricing," he said. "That coupled with the fact that Optus is losing hundreds of millions now means pricing has to become not as aggressive moving forward."

Optus’ vice president of regulatory and public affairs Andrew Sheridan disputed the claims, arguing the company was putting its customers first without a “premium price tag”.

“Like many sectors, telecommunications has not been immune from the financial impacts resulting from COVID-19 including reduced revenues and higher costs which were reflected in our recent half year results,” Mr Sheridan said.

“We stand by our decisions to put customers first. We remain confident that this focus on customers will position our business for sustainable growth as economic conditions and consumer confidence improves.”

Mr Tagliaferro's comments come as Telstra prepares to conduct its biggest restructure since privatisation in 1997. The plans, to be completed by the end of 2021, involve dividing the company into three units based on its fixed line assets, mobile infrastructure and retail business.

Chief executive Andrew Penn said in early November that splitting InfraCo into two businesses - fixed line and mobile infrastructure - offered the telco the opportunity to buy the NBN further down the track or sell off assets.

"If Telstra decides to sell down 49% of the tower and infrastructure assets, it's going to get a much bigger EBITDA multiple than the eight times that Telstra is currently trading at," Mr Tagliaferro said.

Telstra’s shares closed at $3.05 on Thursday, up 1 per cent from the previous trading day. But the telco giant’s share price has slipped more than 14 per cent since the start of the calendar year when it was trading at $3.58.

“Superannuation funds and infrastructure players are looking for high yielding investments and borrowing rates are so low...there is significant value potentially from selling those assets at this point in time,” he said.

Mr Tagliaferro said InfraCo Towers, the unit which includes the mobile infrastructure, could be sold at multiple between 20 to 30 times operating earnings. Goldman Sachs recently said the mobile infrastructure business was worth $4.5 billion.

"The manner of what that takes whether that's a demerger, in a float, or whether that's a private sale to an infrastructure fund or a superannuation fund, I guess that's what we have to have to have to see," he said.

"I can't preempt Telstra is going to do but I would have thought selling off say 49% of the business and Telstra retaining 51% and control of those assets would probably be the best way to do it. But again, if somebody offers a huge price for 100% of the business on the right conditions I'm sure Telstra wouldn't refuse."

Optus is already trying to sell its mobile towers to buyers and a sale expected to take place early next year. Potential buyers of the $2 billion asset include private equity outfits like TPG Capital and Kohlberg Kravis Roberts, as well as specialist infrastructure operators like Axicom and Stilmark.

Telstra pays a dividend of 70 to 90 per cent of underlying earnings. However, Telstra's annual results in August raised concerns among shareholders about the future of its payouts. But Mr Tagliaferro said Telstra's new restructure and a less aggressive pricing market gave him more confidence the 16¢ dividend would continue to be paid to shareholders.

"Changing the pricing dynamic for mobile plus the opportunities for Telstra to monetise some of those infrastructure assets makes us a lot more confident that that 16¢ dividend will be able to be maintained going forward," he said.

Business Briefing

Start the day with major stories, exclusive coverage and expert opinion from our leading business journalists delivered to your inbox. Sign up for the Herald's here and The Age's here.