Telstra unveils major split ahead of NBN sell-off

Telstra has unveiled its biggest shake-up since privatisation, with plans to split the business into three separate entities.

Telstra CEO Andy Penn outlines the telco’s three-way split in Melbourne. Picture: Aaron Francis/The Australian

Telstra has attempted to unlock billions of dollars worth of telecommunications infrastructure through a three-way split of its operations, in a move described by chief executive Andy Penn as one of the most critical since the telco was privatised.

The shake-up would allow the telco to better monetise infrastructure opportunities through a potential sale of its vast holdings of mobile phone towers, particularly given the increased value in 5G and fixed line telecommunication assets.

The restructure would also pave the way for Telstra‘s infrastructure arm InfraCo to one day bid to buy the national broadband network from the government.

NBN Co is heading for a likely privatisation, with Communications Minister Paul Fletcher previously declaring that the company “cannot be owned by a vertically integrated” telco that owns and operates every part of the telecommunications chain.

The three components of the proposed structure will be InfraCo Fixed, which would own and operate Telstra’s fixed line assets; InfraCo Towers and the retail-focussed ServeCo.

Mr Penn described the proposed restructure as the largest corporate change since Telstra was sold by Canberra into a stock market listing more than two decades ago.

“It’s the next step in crystallising the value from our infrastructure,” Mr Penn told The Australian.

“It’s good for customers, it’s good for our people, and it’s good for the country. Historically, telecommunications has been a bit too much fixed in this technology or that technology...What customers want is they want to be connected, and they want a great experience”.

“It will unlock value in the company, improve the returns from the company’s assets and create further optionality for the future. The challenges and disruptions of the last six to 12 months have reinforced the increasing value of infrastructure assets globally; the importance of the digital economy, not only to business but to the whole of Australia and its economic recovery; and the dependence of the digital economy on telecommunications as its platform,” he said.

“Our proposed new corporate structure reflects this new world and will help us support the foundation for it – one that is in the interests of our shareholders, our employees, our customers, and ultimately one that benefits the country overall.”

 

The move will see three new legal entities emerge under the Telstra corporate structure:

• InfraCo Fixed, which would own and operate Telstra’s passive or physical infrastructure assets: the ducts, fibre, data centres, sub-sea cables and exchanges that underpin Telstra’s fixed telecommunications network.

• InfraCo Towers, which would own and operate Telstra’s physical mobile tower assets, which Telstra will look to monetise over time given the strong demand and improving valuations for long-life high-quality infrastructure.

• ServeCo, which would continue to focus on products and services, supporting business and retail customers. ServeCo would own the “active” parts of Telstra’s network, including the radio access network and spectrum assets.

The telco’s low-margin but high-value infrastructure assets, including its fibre networks, data centres and ducts, has been valued at up to $34bn by analysts but was only valued at around $9bn in Telstra’s accounts.

The separation is due for completion by the end of 2021.

Telstra shares climbed on the news, with investors sending the telco up 3 per cent to $3.08.

Chief financial officer Vicki Brady said the steps were “incredibly significant” for Telstra.

“With the value of infrastructure globally, and the pandemic has only reinforced the importance of digital-based infrastructure...These are some really important pieces today,” she said.

Mr Penn added that while the separation sets up InfraCo to potentially buy a privatised NBN Co from the government, any such deal was years away.

“I don’t think that...is likely to be even contemplated for years,” he said. “I don’t think the NBN will be privatised for years. It’s not for me to say that, I’m just using my judgement and experience, but it probably is not going to be made by this management team. It will be many years in the future.”

At an investor briefing on Thursday Telstra reaffirmed its financial 2021 guidance provided in August, and that earnings before interest, taxation, deprecation and amortisation (EBITDA) would return to growth by financial year 2022. The company also said it would continue to pay an annual dividend of 16 cents per share.

“While we do not provide financial guidance beyond the current financial year, our board and management team understands the importance of achieving EBITDA in this range and the actions required to deliver it,” Mr Penn said.

“If we are successful in getting into the bottom end of the $7.5bn to $8.5bn underlying EBITDA range by financial year 2023, this would equate to an estimated ROIC (return on invested capital) of close to 8 percent.

Separately Mr Penn said Telstra’s mobile business continues to perform strongly relative to rivals, boosted by a shift into 5G.

Telstra now has more than 400,000 ultra-fast 5G devices on its network and expects that to reach around 750,000 by the end of the calendar year.

Meanwhile, Mr Penn said Telstra is on track to deliver $2.5bn in net savings by financial year 2022, delivering $1.8bn of this over the past four years, with another $400m expected in financial year 2021