MIDWAY BETWEEN “ACCOUNTING SEPARATION” AND “STRUCTURAL SEPARATION”
06 December 2004 by Richard Chirgwin
Telstra’s Wholesale-Retail Split
If you wanted evidence of Australians’ mal de tete, run through the Telstra sale process. The population were skinned for half the value of the shares they bought, but they still elected a government committed to skinning them a third time.
This is relevant, given last week’s events. The consensus about Ziggy Switkowski’s successor is that whomever gets the gong, he’ll have to be a salesman. As Kate Askew and Colin Kruger put it in Saturday’s Sydney Morning Herald, the next CEO will be expected to “beat the drum” to relieve the carrier’s supposedly inadequate share price.
If that doesn’t scare you, it should. Drum-beating will only serve political interests. It won’t change any of Telstra’s value propositions as an investment – the structural limits on its growth.
What the market now expects, and accepts without even breathing hard, is that regardless of Telstra’s real value, the company will get a CEO willing to pump the share price so the government can sell its 51%.
All of this makes the proposed “wholesale-retail” split a fascinating move.
It’s a couple of years now since the federal government swore that such a split was impossible and unfeasible; and since a federal opposition, cowed by lobbying from the money markets, backed away from a Senate inquiry designed to investigate the structural separation of Telstra.
Back then, the market was dead against any notion of a structural separation – and the investment community was the only sector to speak with one voice. Nearly all of the submissions made to the ill-fated structural separation inquiry were in favour of such a move, a trend which froze the government’s blood. Its response was to write to various institutions, asking them to put the investment community’s case, and was rewarded with a unanimous vote against the proposal. At this point, the ALP lost its bottle and the inquiry was canned.
The thrust of the opposition was simple: Telstra, the investors argued, is only valuable as a vertically-integrated business. As a sop to Telstra’s competitors, which were unanimous supporters of structural separation, the government instituted the “accounting separation” regime which the ACCC has been working to implement for the last year.
Last week’s announcement takes Telstra much further down a path which it (and Ziggy) had strenuously resisted. It’s a “best of both worlds” approach that goes further than accounting separation, without sacrificing Telstra’s capacity to act as an integrated carrier.
Exit the ACCC (As If!)
Telstra’s fervent hope is that the move will appease the ACCC – and that might give us some idea of how the carrier plans to approach the job of “drum beating” in the lead-up to the sale.
I predict its most immediate strategy will be to explain to investors that the more Telstra is able to satisfy the ACCC, the more its share price will rise. This message will be put in a simple, but relentless, media placement strategy to the doyens of the dailies.
That also goes part of the way to explaining why the share price had to be personalised to Ziggy: the thorny relationship between Telstra and the ACCC can now be sheeted home to a departing CEO.
The wink-and-nod of the private briefings will be that the wholesale-retail split was impossible to implement sooner, because it was resisted by the soon-to-be former CEO – an explanation which is probably true, but incomplete.
The other side of the wholesale-retail split goes back to the ACCC. It’s spent a year on the job of implementing the accounting separation regime, and last September it issued a new – and much more detailed – set of record keeping rules for the separation process.
You can bet that the RKRs were the subject of much board debate, and I’ll bet that once the RKRs were fully understood, the board decided that the now-approved split was the easiest road to compliance.
The same restructure will, if the weekend reports were accurate, also create a media group which is to inherit the “sick man of Telstra” – the 50% stake in the loss-making Foxtel which commits the carrier to an ongoing subsidy of the pay-TV business.
Telstra’s never going to sell Foxtel, because to do so would create a ready-made competitor with last-mile access; and as anyone who’s read an Optus annual report can tell you, the best way to sell a pay-TV network is to have it carry phone calls as well.
If Foxtel is to stay with Telstra, then the media division will stay with Telstra. But if those assets are rolled up into a separate division, the carrier can probably convince the markets (and the ACCC) that a separate float is possible.
It’s a scenario which fits with the wholesale-retail split: give the appearance of division, without having to put the integrated business at risk.
I don’t think the ACCC will be fooled. And I hope the public isn’t fooled either.