Telstra must move quickly on NBN

analysis Telstra should move quickly to negotiate as favourable a strategic NBN position possible, analysts have warned after the government's bombshell announcement yesterday that it would separate the telco's retail and wholesale operations if the company didn't voluntarily separate first.

Ultimately, the best thing for Telstra and its shareholders is to work with the government

IDC senior analyst David Cannon

"The writing is on the wall," said IDC senior analyst David Cannon, who believes Telstra should cash in on whatever goodwill it can before negotiations with the government put it on the back foot.

"Ultimately, the best thing for Telstra and its shareholders is to work with the government to get a solution as fast as possible, and deliver on this vision of an NBN," he said. "If that means splitting shareholder value between the two organisations, there's a multitude of ways you could do it to protect the interests of those shareholders."

Cannon also echoed a sentiment that has emerged in the aftermath of the announcement, in which Senator Stephen Conroy made the government's firmest commitment yet to separating Telstra's retail and wholesale operations.

That sentiment relates to the government's obligations to shareholders, more than 1 million of whom bought into the Telstra share float years ago on the assumption that it would be a strong investment into the future. Despite the standoffish tone of the government's announcement, Cannon believes it needs to work together with Telstra to deliver the separation it wants as well as the regulatory certainty for which Telstra's executives have been clamouring for years.

Telstra shares, which were issued at as high as $7.50 per share, were trading at just above $3 today after the announcement. That reflected a more than 10 per cent decline from the $3.47 per share price that the government's Future Fund extracted after dumping 5.5 per cent of its Telstra shares last month.

With Telstra in a precarious position, Cannon believes Telstra should resign itself to change and move quickly to help the government secure a meaningful and effective legislative outcome. "It's best for Telstra to get on-board, negotiate as much equity as it can in the NBN, and take it to the next level as quickly as possible," he said. "To keep fighting would seem like they were trying to hold back the tide."

Proof in the pudding
Not all observers were convinced the government's checkmate will mean smooth sailing towards separation, however. IBRS analyst Guy Cranswick, for one, lauded the move as "long overdue" but cautioned that the terms of separation are still very much up in the air — and cited Labor's spotty track record in telecommunications policy as a sign that Telstra isn't likely to throw in the towel just yet.

"There's still a lot to look at, and my biggest question is to see how the government handles all of this," he explained. "Their track record, and their strategic planning internally around the broadband issue has been less than outstanding: they went forward on the basis of an election promise on the hoof, then created an entire plan which, as time went on, has become less and less realistic."

"Their single-minded focus [on separation] is quite intriguing, but they've got to be able to have a wider view and think in many directions so they don't walk into the same problems again and again."

There's still a lot to look at, and my biggest question is to see how the government handles all of this

IBRS analyst Guy Cranswick

Ovum research director David Kennedy agreed. "I don't think the government really wants to have to manage separation itself," he explained. "The fact is that they're likely to get it wrong: they don't know enough about Telstra's internal operations to know where is the best place to separate retail from wholesale. It's most likely that Telstra will already have a proposal that's best for all concerned."

Senator Conroy yesterday insinuated that the government and Telstra have already discussed the potential nature of a separation push — and that Telstra already has a blueprint for the change in place.

"I think it would be fair to say Telstra have been preparing for today for a considerable period of time," he said in a press conference. "Since the change of leadership [and appointment of current CEO David Thodey], they put an enormous [amount] of work, very constructive work, into being prepared ... They were very well prepared already when we had our first meeting."

Conroy was optimistic about the company's more open position after meeting with Thodey in June, flagging the chance for "meaningful dialogue" with the company, which had maintained a combative stance during the leadership of former CEO Sol Trujillo. After Conroy's announcement yesterday, Thodey said in a statement that he was "disappointed" in the decision but would continue engaging in discussions with the government.

Whether or not Conroy's announcement came as a surprise to Telstra, it has raised warning flags for some observers. Ed Husic, national president of the union representing the most Telstra employees, the Communications, Electrical and Plumbing Union, expressed concern at the lack of consultation before the government policy was announced, pointing out the uncertainties related to jobs and arguing that much of the advice given to the government during its consultation process was biased towards separation.

Ovum research director David Kennedy, however, believes the government had no choice but to draw the line after separation continued as a common thread throughout the government's consultation process.

"It was clear from the discussion paper they issued earlier in the year that this was what they had in mind," he explained. "This is a golden opportunity to create a transition strategy from copper to fibre. And if the government had not done it now, after considering the results of its discussion paper, they would have left themselves hostage to Telstra in the future. It was now or never, and they've clearly decided that now is the time for things to change."