Telstra Puts AU$1B Price on Separation

Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) faces a bill of up to 1 billion Australian dollars ($843 million) to implement separation of its wholesale and retail businesses, depending on the outcome of the government review, says the company's CFO, John Stanhope .

The Commonwealth review includes a discussion paper calling for submissions from participants on the general telecom environment and the role of Telstra, the formerly government-run telco, in particular. Tesltra's separation has come up as the government wants to construct a National Broadband Network (NBN), which could use some Telstra facilities.

Telstra expects an outcome from the review, including any possible legislation, by the end of the year, and CEO David Thodey says Telstra understands the need for equivalence and transparency and needs, more than anything else, regulatory certainty.

However, the telco is preparing for a range of outcomes from the implementation of an adjudicator, which was actually part of its own submission, to that plus-transfer pricing, or that plus-transfer pricing plus partitioned systems.

"As you go up those forms of separation, it costs you more, and it takes you longer," Stanhope says.

Putting numbers on the scenarios, Stanhope says a separation "lite" model, along similar lines to Telecom New Zealand Ltd. (NYSE: NZT; New Zealand: TEL), with just transfer pricing, would cost the company 4 cents per share, or a total of AU$500 million ($522 million) and take a year to implement.

At the higher end of the scale, with a greater level of functional separation along the lines of that undertaken by BT Group plc (NYSE: BT; London: BTA), the separation would cost 10 cents per share, or an initial cost of between AU$800 million (AU$675 million) and AU$1 billion ($843 million). It will also incur ongoing costs of AU$50 million ($42 million) to AU$100 million ($84 million) a year, he says.

The timing and commonality of issues, particularly around the usage of Telstra copper network, means that the review and the National Broadband Network (NBN) are inextricably linked. Stanhope though is adamant that any decision on separation should not impact on the NBN development. It shouldn't be a "distraction from what we know is the main game -- the NBN," he says.

And even though full structural separation is not amongst the scenarios Stanhope has modeled, Thodey says, "Nothing is off the table," and all options for Telstra regarding Australia's NBN are open.

"Nothing is unthinkable, but everything has a price," he says. This was his answer to a question about whether the structural separation of Telstra's copper network as part of the NBN, as suggested by some of Telstra's competitors, would be considered by Telstra. However, as far as Telstra is concerned, the bottom line remains the value of any NBN involvement to shareholders.

The saga of Australia's FTTx NBN has already gone through many twists and turns, beginning with Telstra's disqualification from the original bidding process on a technicality. (See Telstra Dumped From FTTx Project.)

This was followed by a U-turn when the government couldn't find a suitable bidder, and the creation of a separate NBN company, which is now headed by Mike Quigley, formerly president and COO of Alcatel. (See Australia Unveils $31B FTTP Plan and Quigley Named NBN Chief.)

Now back in the game, Thodey says that Telstra is in active and productive dialogue with the government and that Telstra has "got to be at the table to get some agreement." He continues saying that the issues are very complex and there are still lots of decisions to be made including: the type of network, how it will be rolled out, how to finance it, and how to service it. The key determinants are now the implementation study, which will take six to nine months, and that the timetable will be driven by the government.

— Catherine Haslam, Asia Editor, Light Reading