Telstra offloads towers stake in shock $2.8bn Future Fund deal

Telstra shares rise as it says 50pc of the proceeds of the sale of a stake in its towers business will be returned to shareholders.

Telstra CEO Andy Penn promises a return to shareholders from the deal. Picture: Aaron Francis

Telstra shares have jumped by more than 4 per cent after the company announced it will sell 49 per cent of its towers business for $2.8bn to a consortium including the Future Fund, Commonwealth Superannuation Corporation and Sunsuper, with 50 per cent of the proceeds set to be returned to shareholders.

The telco announced in March it would split in four as part of a massive restructure, and was set to auction off its towers business before the end of the year, in an auction run by Macquarie Capital.

This unexpected deal values the InfraCo Towers business at $5.9bn, and comes as rival Optus is also mulling a sale of its communications towers.

"This is a compelling partner," Telstra chief executive Andrew Penn told The Australian. "If you look at the quality of the consortium, the Future Fund, the Commonwealth Superannuation Corporation, and Sunsuper in conjunction with Morrison, we're very attracted by that.

"It's a very competitive price, 28 times EBIT multiple is pretty impressive, particularly when you look in global benchmarks. I can't see anything that's trading above that, where the vendor has retained control of the asset.”

The executive said the consortium would ‘allow Telstra to continue to preserve its network leadership’, as opposed to an auction process which would havbe been more complicated.

“The consortium approached us with a pretty compelling proposition and we've worked incredibly hard and attempt an amazing job to get to a position where we're now on the last day of the financial year.

“Today’s announcement is a further endorsement of the T22 strategy, as the establishment of our infrastructure assets as a separate business was designed to enable us to better realise the value of these assets, take advantage of potential monetisation opportunities and create additional value for shareholders and that is exactly what today’s announcement achieves.”

Investors have welcomed the deal, sending shares in the company up 4.44 per cent to $3.76 at 1.15pm AEST.

The telco is now up 20 per cent over the past 12 months, and 25 per cent since the start of the year.

Telstra had previously intended to commence the process to seek external strategic investment in the Towers business in early FY22, with a view to completing any transaction by the end of the 2022 calendar year.

“We were approached by the consortium earlier in the year as they recognised the value of these assets and provided a compelling rationale to progress the transaction ahead of schedule,” Mr Penn said.

“We believe the value of the transaction; the high calibre consortium members and the terms of the agreement which protect Telstra’s network differentiation, support our decision to accelerate the process.”

He added that as part of the transaction, Telstra would retain majority ownership of InfraCo Towers and continue to own the active parts of its network, including the radio access equipment and spectrum assets.

The telco will direct $75m from the part sale of its Towers business to boost connectivity in regional Australia, adding to the telco’s recent announcements of $150m regional investment for FY22 and the $200m co-investment fund that aims to generate investment in improving regional mobile coverage over the next four years.

Telstra is rolling out mobile phone towers.

He also said he expects to return 50 per cent of net proceeds to shareholders.

“We anticipate providing further details about the manner in which we will return those proceeds, including a potential share buyback in FY22, at our full-year results in August. The remainder of the proceeds will be used for debt reduction to ensure we maintain balance sheet strength and flexibility.

“This level of debt reduction is important to deliver a broadly neutral credit outcome given the long-term Tower access obligations created by the transaction.”

The deal is expected to close in Q3 2021.

“We are a large investor in Australian infrastructure which plays an important role in our portfolio,” Future Fund CEO Raphael Arndt said.

“This investment further strengthens our exposure to digital infrastructure and the long-term thematic of data growth. We are pleased to partner with Telstra to play an important role in strengthening Australia’s 5G infrastructure. The long-term growth potential and defensive cash flow profile of this investment is a valuable fit with our focus on diversification across the portfolio.”

Moody’s Investors Service vice president Ian Chitterer said the deal would be credit positive in the short term, as it will lower leverage because part of the proceeds will be used to reduce debt.

“From a long-term perspective, it is slightly credit negative as Telstra will lose the financial flexibility to monetize the assets without giving up control, should such a sale be required,” Mr Chitterer said. “That said, we do not envisage that this would be likely given Telstra’s demonstrated commitment to maintaining its strong credit profile and our expectation that fiscal 2021 will be a turning point for earnings.”

Goldman Sachs analysts have tipped Telstra shares to soar even higher, with the broker retaining its buy rating and lifting its price target to $4.20, declaring its mobile business is well-placed for further growth. It said Telstra is well positioned given future 5G price rises and international roaming recovery.

“We have high conviction on the quantum of mobile market repair that is occurring in Australia, along Telstra’s ability to grow subscribers and ARPU across FY21-23E,” its analysts said in a note.