Analysts: Future of separated Telstra is rosy

Telstra separation writing was on the wall with the announcement of the NBN but things look good from here

Leading telecommunications analysts have predicted a rosy future for Telstra (ASX: TLS), despite the telco claiming the Federal Government's attempts to force it to separate would hurt the business.

In September the Federal Government said it wants Telstra to structurally separate and if the telco giant won't do so voluntarily the Rudd administration will use regulation to achieve the goal.

Since then, Telstra has said the proposed bill would harm consumers, particularly in remote areas, and "potentially destroy value for the approximately 1.4 million Australian shareholders who purchased Telstra shares from the Government over the past 12 years and have a significant detrimental impact on our employees".

But according to research firm RBS, Telstra’s share price could jump by 40 per cent as a result of structural separation.

Speaking on ABC television's Inside Business this week, RBS analyst Ian Martin said the research house had a price target on the telco of $4.40 – at 3.30 pm on October 19 Telstra's share price was $3.31.

Martin said the current range of estimates for a price target for Telstra were a result of uncertainty over where the company was heading over the next 10 years, and what effect the National Broadband Network (NBN) would have on it..

“The worst case outcome for Telstra that I can model is that they'll be competing with an NBN Co, and you do get some quite dire outcomes there, but you've still got very good growth in other parts of the business.” Martin said. “You've still got very good growth in fixed line. It's just quite a different model with more competition and uncertainty. I think it's the uncertainty that's factoring into the prices here, not the outcome itself, I think, will still be reasonably positive.”

The most likely outcome for Telstra was that it would reach a cooperative agreement with NBN Co either late this year or early next year which would see it migrate traffic onto the NBN Co network over a number of years, Martin said.

Martin said structural separation for Telstra, while not desirable for Telstra itself, was almost inevitable once the Government had announced it would be prepared to spend to build its own rival access business, the NBN.

“…Australia can't really have two commercial access businesses, so you've got to strike an agreement between the two of them, I think,” he said.

Martin said that, in his view, the current separation was Draconian, however it needed to be viewed as part of the bargaining process between Telstra and the Federal Government.

“Most of the bargaining power remains with Telstra because they have got a growing concern, they've got the customers, they've got the traffic,”’ he said. “NBN Co has got the Government and the Government's capital behind them. But still you'd say the bulk of bargaining power is with Telstra, and this legislation redresses that to some extent.

“I think the Minister's indicated that, with the right agreement between Telstra and NBN Co, those provisions may not be in the final legislation. He's indicated they're there for negotiating purposes, and I think I can't see Telstra working out an agreement with NBN Co while those threats still hang over it.”

IDC telecommunications program director, David Cannon, said Telstra should look to sell its access infrastructure to NBN Co for the "best price possible" and negotiate as higher ownership percentage of NBN Co as possible.

He added the research firm "believes there will be a swift and decisive structural separation of Telstra."

"Hence, in three years time the process of separation will be almost complete, leaving Telstra with it's HFC and Foxtel assets in tact," he said. "In ten years time, Telstra will still have a similar market share for consumer voice and data services but will be enjoying new media and computing services revenue with an improved operational cost structure. Shareholders who bought at today's prices will be happy."

Strident Telstra critic and Buddecomm director, Paul Budde, agreed the telco should work closely with NBN Co. The analyst added Telstra CEO, David Thodey, was "the right man at the right time and I have no doubt that he will steer the company through these turbulent times".

Budde claimed Telstra would be a "totally different company, truly customer focused and a leader in the ICT industry".

With reporting by Tim Lohman

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