Why Telstra is spinning off a new $11 billion infrastructure business

Photo: Getty Images
  • Telstra is establishing a separate business to hold its infrastructure assets.
  • The move gives Telstra the potential to spin off the unit as a separate ASX-listed company or take on strategic investors.
  • The business will have its own CEO, assets of $11 billion and revenue of $5.5 billion.

Telstra is creating a standalone infrastructure business with assets of $11 billion and revenue of $5.5 billion, opening the way for a separate ASX-listing or “a strategic investor” in a part trade sale.

The move is a key plank in response to the erosion of Telstra’s dominant position as Australia’s biggest telco as competition intensifies.

The NBN roll-out is smothering Telstra’s valuable fixed-line business and the company has had to accept lower margins to protect its market share.

The telco in April said underlying earnings in the full year would be at the lower end of its guidance range between $10.1 billion and $10.6 billion, mainly because of increased competition.

Telstra shares have fallen by two-thirds from a high of $9.07 in late 1999 to $2.91 at yesterday’s close.

From July 1, InfraCo will be made up of Telstra’s high quality fixed network infrastructure including data centres, non-mobiles related domestic fibre, copper, HFC, international subsea cables, exchanges, poles, ducts and pipes.

Its services will be sold to Telstra, wholesale customers and NBN co.

Telstra InfraCo will also include Telstra’s NBN commercial works activities and Telstra Wholesale, with a total workforce of 3,000.

“As technology innovation is increasingly relying on connectivity, the role of telecommunications infrastructure is becoming more important,” says Telstra CEO Andrew Penn.

“There is virtually no technological innovation happening today that does not rely on a high quality, reliable, safe and secure telecommunications network.

“In this world our infrastructure assets are becoming more valuable. By creating a new infrastructure focused business unit we will better optimise and manage these assets.”

In an investor day presentation, Telstra points to “a potential demerger or the entry of a strategic investor” once the NBN rollout concludes.

Telstra has been progressively transferring its high-margin fixed-line access network to the government-owned NBN in exchange for a series of compensation payments.

The establishment of the NBN will structurally separate Telstra’s fixed-line services, leaving it to compete on equal terms against other retail service providers.

The earnings impact of migrating to the NBN is likely to be at least $3 billion, according to ratings agency S&P.

Here’s what InfraCo will look like:

Image: From the Telstra2022 strategy

Excluded from the new business are the mobile network assets including spectrum, radio access equipment, towers and some elements of backhaul fibre.

Penn says the new business will, with revenue of $5.5 billion and EBITDA of $3 billion, will have its own CEO reporting to him.

“Two years ago we commenced a project to monetise the payments we were receiving from the nbn for access to our infrastructure,” he says in a briefing to be delivered at an investor day,” says Penn.

“Fundamentally what stood behind this initiative was a belief that our telecommunications infrastructure assets were the most valuable in the country.

“With the increasingly important role that telecommunications is playing today, that value is only increasing. We have continued to look at ways in which we can maximise this value and make it transparent to you while creating efficiency and optionality in the business.”

Here’s how Telstra is being split:

Source: Telstra

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