Australia Government Mulls Break-Up of Telstra

Telstra, Australia's largest telephone company, may be forced to split its network and retail business to break a deadlock over building a high-speed broadband network and to boost
competition.

Communications Minister Helen Coonan said this week a structural separation of Telstra was one option being considered as part of a plan to speed up the building of a high-speed broadband Internet network across the country.

Plans by Telstra, a former government monopoly, to build a fibre broadband network have stalled after two years of haggling with the regulators over pricing, and the country has fallen behind on broadband speed.

The Australian government plans to hold an open tender to break the impasse, and could require Telstra to separate its network operations from the retail services business to provide greater transparency and level the playing field between rivals.

Broadband speed has become a thorny political issue ahead of a federal election likely to be held in November, and the Opposition Labor Party has its own proposal that would also separate the fibre network operator from the retail business.

"Telstra is not going to be able to stay the way it is under Labor, or under us," Coonan told the Australian newspaper in an interview published on Thursday. 

Talk of a break-up has gained currency after last week's ruling by the New Zealand government that Telecom Corp of New Zealand be split into three separate operating units to speed the introduction of broadband services.

In Australia, Telstra and a rival consortium headed by Singapore Telecom unit Optus have put forward proposals to build a fibre-to-the-node (FTTN) network, and other companies including Deutsche Telekom are considering bidding.

"If Telstra builds FTTN, it will take you back to square one because it re-monopolises the network," said ABN AMRO Asset Management investment analyst Theo Maas. "You're stuck with an incumbent who owns the only network in the country, and from a regulator's point of view that is a concern."

The Federal Government sold down its 100% holding of Telstra in three tranches, the last in November 2006, though a 17% stake still resides with a special pension fund set up at arm's length from the government.

Shares in Telstra, which has a market capitalization of A$57.5 billion (US$51 billion), were down 0.9% at A$4.37, in line with the broader market.

Analysts said the risk of a break-up has in part weighed down on Telstra's share price, which is flat over the past month compared with a 5.6% rise in the benchmark. 

A Telstra spokesman said the company would oppose any attempt to break it up, saying such a risk should have been flagged to investors during the privatization process. "We believe Telstra operates much better as it is," spokesman Jeremy Mitchell told Reuters.

A report by Morgan Stanley said a break-up could release extra value for shareholders, but other analysts disputed that.

"The market is currently assuming Telstra maintains a dominant market share position in fixed-line broadband and mobile into perpetuity, but that could prove optimistic," said Citigroup analyst Tim Smeallie, who said a break-up could push the share price down to A$3.70.

Telstra, under Chief Executive Sol Trujillo, has taken a combative stance on regulation and is suing the government in two separate cases, one over funding to arch rival Optus.

Macquarie Equities analyst Andrew Levy said a break-up would be a negative for Telstra, but not devastating, with the biggest impact likely to be on the firm's five-year overhaul plan.

"With Telstra running flat chat to meet tough deadlines, imposing operational separation on the company may well lead to management putting back key deadlines," he told clients.