Telstra has raised the prospect of its newly split out infrastructure business InfraCo making a commercial play for the NBN, should the government proceed to privatise the network in future.
Chairman John Mullen told Telstra’s annual general meeting yesterday that InfraCo was created in part to allow Telstra to “move quickly” in the event NBN Co was put up for sale.
“We believe at some stage the issue with the NBN will have to be addressed by government of one side or the other, and we want to be in a position to capture the benefit for Telstra shareholders should that happen,” Mullen said.
“NBN Co pays Telstra about $1 billion a year for accessing all its ducts and the like. If and when NBN Co is privatised we think there could be - only could be, no certainty - a lot of value uplift to Telstra shareholders if there was some form of combination of that infrastructure business [InfraCo] with the NBN.”
Mullen said that while Telstra remained integrated it “could never” contemplate buying NBN Co or some of its assets.
“The competition authorities would never allow us to have a commercial relationship or tie-up with NBN Co,” he said.
“But were the companies separated, we potentially could.”
InfraCo is a standalone business unit that runs Telstra’s data centres, fibre, HFC, subsea cables, exchanges, poles, ducts and pipes. It was formed as part of Telstra’s T22 transformation strategy.
Mullen said that Telstra wanted to “preserve optionality” to be able to react to any future opportunity to buy back into the NBN.
“It may happen next year, it may happen in five years, or it may never happen, but we would like to be in a position to move quickly if indeed there is an opportunity there to capture a lot of that value arbitrage uplift,” Mullen said.
Buying back an upgraded national wholesale infrastructure could go some way to filling the financial hole that the loss of the copper network has left Telstra - and its shareholders - with.
Mullen said yesterday that, when the NBN is complete, Telstra’s net profit after tax will be close to half what it was pre-NBN.
The lower profit has irked shareholders as their dividends have been cut.
Having greater control over the NBN infrastructure could also help Telstra make its NBN business more profitable.
CEO Andy Penn yesterday sought a halving of the present wholesale price charged by NBN Co to arrest the trend of reseller margins “rapidly falling to zero”.
Vocus has also been consistently vocal about the drastically reduced margins available when selling NBN compared to ADSL.
In addition to internally restructuring itself in preparation for a future play at NBN Co or its assets, Mullen said that Telstra hoped separating out InfraCo might attract high-paying investors for the telco.
“We believe that the Telstra share price is undervalued, and one of the reasons we say that is if you look at that InfraCo business, were it a standalone company, it’s extremely attractive to infrastructure type investors,” he said.
“We believe that it could or should be valued at a considerably higher multiple of earnings - like double or more - that we achieve in Telstra as a whole.
“Because there is so much doubt around the NBN and all these other things when it’s all lumped together, we think that depresses the share price.
“We think it makes a lot of sense to separate out that InfraCo and make it transparent to the market that this is an asset that is extremely valuable.
“InfraCo is a $5 billion business with $3 billon of EBITDA in itself which is an extremely valuable asset. Infrastructure funds pay double digit multiples for companies like that.”