Structural separation semantics
Morris Kaplan, one-time stockbroker and venture capitalist, brings his finance skills and recent experience as a business journalist and writer to IT, with a special interest in telecoms and how communications is being transformed by technology.
Some years ago (2003), Caltex was involved in a nasty public relations situation. An internal memo leaked to the media, advocating the use of "fear, uncertainty and doubt" to dent the confidence of 650 franchisees in negotiations over the company's petrol-retailing joint venture with Woolworths. This practice soon became known as the ‘FUD’ factor.
The Caltex incident comes to mind at this point in the deliberations over the question of the structural separation of Telstra.
This week’s news that the government would reattempt the forced structural separation of Telstra’s wholesale and retail arms has unleashed a tidal wave of commentary from various interested parties.
While the announcement looks as though the Government has pointed a gun at Telstra, there may in fact be a silver lining in all of this — at least for consumers. The question is: Is this at Telstra’s expense?
Stuart Wilson, chief executive of the Australian Shareholders' Association says the move is bad news for Telstra share profitability as it “sets all sorts of limitations on Telstra to the point where profitability will be affected.”
Meanwhile, the government is saying that Telstra has been getting a competitive advantage because its has 60 per cent margins on its fixed communications network, and that access and equality can only be achieved by the split in the wholesale and retail arms.
There is another view and that is that the assets, that is, the infrastructure of Telstra, be treated in the same way as utilities such as water and electricity utilities.
The ‘treatment’ referred to here, is how investors view such investment opportunities.
Utilities are not very exciting for investors but they do represent a kind of guaranteed rate of return on the assets. This in effect gives an infrastructure style asset some kind of ‘trustee’ status whereby it can qualify for being held by superannuation funds and other like funds (for example North American pension funds).
These same funds may be excluded form owning Telstra shares where they may be considered as being a retailer of telecommunications products and services and hence losing some of the ‘guaranteed’ rate of return.
For sure, Telstra has benefited from the vertical integration of its various businesses. After all, it makes sound commercial sense to control up and down the supply chain: Nice if you get it. But, as Bob Dylan keeps reminding us, “the times, they are a-changing.”
The NBN economics may not deliver Telstra the bonanza some predict. It is said that the NBN assumption includes a 70 per cent penetration of fibre optic connections. This is despite the fact that the two countries that lead the world in fibre connection (South Korea and Finland) have penetration of only 30 per cent. The share price hit its all time low of $2.58 this week and that tells the story in spades. The FUD factor is now in shareholders’ minds.