Aus & NZ: Telstra to split off AUD 11bn infrastructure arm

20 June 2018 - 12:00 am UTC

Australia’s biggest telco, Telstra, will split out its fixed telecommunications infrastructure on 1 July and in future seek either a full demerger or external investors, it announced on Wednesday.

To be known as Telstra InfraCo, the AUD 11bn (USD 8.12bn) business will include its data centres, fibre, Hybrid Fibre Coaxial cable, copper phone lines, international subsea cables, exchanges, poles, ducts and pipes as well as 3,000 staff.

It will also include its National Broadband Network (NBN) “commercial works” business and Telstra Wholesale, which sells telco services to businesses.

InfraCo won’t include Telstra’s mobile network and some parts of its “backhaul fibre”.

It will have its own chief executive reporting to CEO, Andrew Penn, and proforma revenue of about AUD 5.5bn and earnings before interest, depreciation and amortisation of around AUD 3bn based on estimates for the company’s 2018 financial year.

In a stock exchange announcement prior to its annual strategy briefing on Wednesday, the company said “importantly Telstra InfraCo will provide significant optionality for Telstra in the future for a potential demerger or the entry of a strategic investor once the NBN rollout concludes”.

The NBN is a national broadband network being installed by the federal government owned NBN Co. It was established by the previous Labor government and is due to complete the network by 2020.

The company also flagged the “monetisation” of up to AUD 2bn in assets over the next two years. A spokesperson could not say which assets.

Head of Telstra Wholesale, Will Irving, said two-thirds of InfraCo’s earnings would come from long term cashflows such as the payments it receives for access to its network which it has been paid since NBN Co was established.

“[EBITDA] splits roughly into two thirds of recurring, long term revenue and that includes the NBN receipts which are inflation linked and grow over the next 30-plus years,” Irving told anlaysts and investors at its strategy day. “Then there is the one third which relates to legacy assets and the rollout of the NBN and that is declining each year.”

Two years ago Telstra began looking at securitising and selling cash flows from payments it receives for access to its network. Several infrastructure investors were considering this.

“What stood behind this is a belief that our communications assets were the most valuable in the country. That value is only increasing,” Penn said at the strategy day.

Infrastructure investors have been eyeing corporate assets with renewed interest as several years of privatisations by state governments comes to a close with the sale of 51% of WestConnex.

Telecommunications and data assets are a relatively new area for infrastructure investors in Australia, but many have shown interest in data centres and telco networks where they fit their risk and return requirements.

CPPIB, AIMCo and Kindle bought the Broadcast Australia TV and radio network in 1999 from the federal government. More recently a consortium including MIRA and UniSuper bought the Australian mobile network assets of US listed Crown Castle (now known as Axicom) in 2015.

Canberra Data Centres was acquired by Infratil and Commonwealth Super in 2016.

Telstra’s move is part of its Telstra2022 Strategy, which includes cutting 8,000 staff, and simplifying its retail business, such as reducing 1,800 consumer and small business plans to 20.

Penn said the move is part of its shift to 5G mobile technology. Combined with changes to new software and “machine learning”, he said this will see a major transformation in the business model of telcos.

“We intend to transform the nature of telecommunications products and services and remove pain points and frustrations,” Penn said. “Our legacy operations are now holding us back and we’re at a tipping point.”

Despite the big overhaul – which is aimed at reversing the impact on Telstra’s earnings of the rollout of the NBN and increased competition – the company’s share price dropped sharply after the announcement. It was down 4.17% at AUD 2.76 by the close of trade on Wednesday. It has dropped more than 23% in the past year.