Telstra facing three big decisions: Kohler

Telstra’s board and management are facing three big decisions, not just one: to structurally separate or not, then to compete with the NBN or not, but first of all whether to campaign against Stephen Conroy’s legislation.

As a thought experiment, imagine that Telstra demerged now into a retail company and a wholesale network operator and you were put in charge of the latter. Would you just sell network assets to Stephen Conroy’s NBN Co and become a minor shareholder of it? The answer, of course, is that it depends on the deal.

But if the Government believes that forcing structural separation on Telstra means that the NBN will therefore be a more profitable monopoly because Telstra won’t compete, it may be sadly mistaken.

The Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 that Senator Conroy dramatically released two weeks ago today, having kept its development entirely secret, does not mention the national broadband network or the NBN Company.

The bill is entirely focused on achieving structural separation of Telstra by withholding mobile spectrum unless an enforceable undertaking is given along the following lines: “…at all times after a day specified in the undertaking, Telstra will not supply fixed-line carriage services to retail customers using a telecommunications network over which Telstra is in a position to exercise control; and Telstra will not be in a position to exercise control of a company that supplies fixed-line carriage services to retail customers using a telecommunications network over which Telstra is in a position to exercise control.”

The rest of the bill’s 141 pages are generally aimed at closing off loopholes and ensuring Telstra can’t wriggle out of it.

The suggestion from Anton Tagliaferro of Investors Mutual that it is something from Communist Russia, or from former Telstra executive Phil Burgess that it’s like Hugo Chavez of Venezuela, obviously reflects how many shareholders see the situation, but as the Minister has repeatedly said, Telstra has a choice.

It’s not much of a choice, but that’s what it is: control of the fixed-line network or mobile spectrum.

Anton Tagliaferro’s campaign against structural separation could influence the board’s decision if it turns into a full scale rebellion, but it is hard to imagine it changing the government’s position unless the Telstra board and management join in.

It is hard to imagine a loose campaign by a group of Telstra shareholders uniting all opposition senators and independents against splitting Telstra up.

So the first question for Telstra’s board is: do they join Anton Tagliaferro’s campaign? Do they, in the nicest possible way, go back to opposing the government rather than sucking up, and try to beat the legislation?

In a way Senator Conroy has left that door that open by implementing the policy as legislation. He is, in a way, challenging Telstra to take him on. So that’s decision number one.

If the legislation is passed, the jig is up, the campaigners will have lost, and the government’s policy will be in place and unchangeable.

Telstra’s board will then have to decide whether to provide the required undertakings about structural separation (as described above), plus the sale of Foxtel and divestment of its HFC cable (with the prospect of being let off the last two if the first is accepted).

It may be that institutional shareholders, led by Anton Tagliaferro, continue to campaign against structural separation, but that will be in the context of a choice by their directors between two unwanted changes, not an absence of any change.

If Telstra does provide the undertakings, the ACCC will then decide whether or not to accept them. On the matter of how the ACCC decides this, the bill is exquisitely circular, giving the Minister and the ACCC complete freedom to do whatever they like.

It’s a classic piece of legislative drafting:

“(2) In deciding whether to accept an undertaking under subsection (1), the ACCC must have regard to:
(a) the matters (if any) set out in an instrument in force under subsection (3); and
(b) such other matters (if any) as the ACCC considers relevant.

(3) The Minister may, by writing, set out matters for the purposes of paragraph (2)(a).”

If the Telstra board decides not to provide those undertakings, they must by then have developed a new corporate strategy that does not require new 4G mobile spectrum, and therefore involves limited growth in wireless. They will have done this because, in their view, integration is more valuable to shareholders.

If they decide to provide the undertakings, they will have developed a different new corporate strategy that involves focusing on retail fixed line services and growth in wireless.

Either way, Telstra’s board and management must come up with a new corporate plan, and a new way of thinking.

If this “legislated blackmail”, as Henry Ergas calls it, results in the complete separation of Telstra’s retail and wholesale network operations, perhaps by means of a normal “two pieces of paper for one” demerger, then – and only then – will the new board of the network business have to decide what to do about the NBN.

At this point, this will be an entirely new decision by a whole new set of people. They will have responsibility for managing a $25 billion set of assets – let’s call it Telecom Australia – delivering wholesale telecommunications services to retail providers, including one named Telstra.

And there will be this other company with an experienced management team and a tough board, majority owned or perhaps still 100 per cent owned by the government, building another wholesale telecommunications network – this one fibre all the way to the home.

What does the board of Telecom Australia do? Throw up their arms and say they can’t compete and hand over their assets to Mike Quigley and Co?

I don’t think so. They might decide to compete with the NBN, or they might decide to join with it. It all depends on the deal at the time.

Alternatively the negotiation over that deal might be undertaken by the current board of Telstra because they have decided to go without 4G spectrum and remain integrated. In that case, it seems to me, they will definitely compete with the NBN – otherwise why remain integrated?

There’s no way Telstra would get an advantage out of being a shareholder of the NBN – doing an asset-for-scrip deal with the NBN Co at that point would simply be a back-door structural separation. So a decision by Telstra to resist structural separation will also be a decision to compete with the NBN.

And the only way around all this is for the legislation to be defeated in the Senate.

This article first appeared on Business Spectator.