Benson today on SMH. As the tiles says. TLS is not for the faint hearted.

https://www.smh.com.au/business/companies/investing-in-telstra-is-a-game-of-regulatory-roulette-20190214-p50xqa.html

Investing in Telstra is a game of regulatory roulette

By John McDuling

February 15, 2019 — 12.00am

• Share on Facebook
• Share on Twitter
• Send via Email

Normal text sizeLarger text sizeVery large text size

Telstra CEO Andy Penn delivered reasonable half-year results in tough circumstances. But the behemoth telco's future hinges on factors completely outside of his control.

Thursday's bang-in-line with analyst expectations numbers for the December half must have come as a relief for Penn, who was at serious risk of losing his job last year.

Telstra CEO Andy Penn.CREDIT:RYAN STUART

Telstra actually beat forecasts with 239,000 mobile customers on contracts added. But bright spots in mobile were tempered by weakness elsewhere, and an interim dividend of 8¢ was described by both Goldman Sachs and JPMorgan as "disappointing".

In any case, assuming Penn doesn't do anything ridiculous and his T22 cost-cutting strategy plays out, government policy and the whims of regulators are now the big wildcards facing Telstra and its 1.4 million shareholders.

Advertisement

"Regulation will always play a role in the telco industry, I accept that because it's a critical form of infrastructure," Penn says. "What we are looking for is for that not to distort the incentives to invest, and the rewards for investing."

The first policy variable outside Penn's control that will have a big bearing on Telstra's future  is the competition regulator's decision on whether to allow rival mobile operators Vodafone and TPG Telecom to merge.

Penn wouldn't be drawn on whether he thinks the merger will get over the line, and Telstra has not publicly stated a position on the deal.

Yet the market reaction (news of the merger back in August last year triggered the biggest one day surge in Telstra shares in about a decade) strongly hints at what he must be thinking. Companies don't often enjoy seeing competitors merge, but Telstra would argue the mobile market has become irrational.

The problem is, the Australian Competition and Consumer Commission is less enamoured with the Voda-TPG tie-up, fearing it will substantially reduce competition.

RELATED ARTICLE

ACCC

ACCC is looking at the wrong issues in Vodafone-TPG merger

Add to shortlist

Last month, TPG shelved plans to build Australia's fourth mobile network, citing the ban of Chinese equipment vendor Huawei by security agencies. The ACCC appears unimpressed by that announcement, adding further uncertainty to the situation.

The second policy variable facing Telstra is whether a Shorten Labor government will write-down the value of the National Broadband Network, as it is already signalling is eminently possible.

A write-down in theory, would allow the NBN to reduce the wholesale prices it charges its retail-facing customers, like Telstra, who are complaining that it is impossible to make a profit reselling the network.

Penn is making no secret of his desire to see NBN wholesale prices cut, regardless of whether that results in an NBN write-down. He warned on Thursday that Telstra's fixed line margins are rapidly heading to zero. And if no one can make money from reselling the NBN, it will ultimately lead to higher retail prices, and/or more substitution of fixed line internet with wireless products.

Yet an NBN write-down is far from inevitable. For starters, there is an election to get through. A Labor victory may seem likely, but it is not certain. As well, as my colleague Stephen Bartholomeusz has pointed out, the NBN's equity base is actually lower than the amount that would need to be written off for a meaningful cut to wholesale prices to happen.

On top of this, ACCC chair Rod Sims has already expressed caution about the consumer benefits of a write-down. And then there are the uncertain politics of who would be blamed for the ensuing hit to the federal finances it would cause.

The final and perhaps most important long-term regulatory variable facing Telstra also involves the NBN, and Penn's newly established 'InfraCo' unit.

A seriously under pressure Penn set up InfraCo in August, which houses $11 billion worth of fixed line infrastructure assets that could eventually be sold, or merged with the NBN.

Ironically, Telstra bitterly resisted selling these assets to the NBN when it was first conceived,  instead leasing its infrastructure to the new government project.

That is now beside the point though.  A transaction structured properly could unlock value for Telstra shareholders, and improve the economics of the massive infrastructure project.

The optics would need to be delicately managed though. Any suggestion Telstra shareholders were getting a sweet deal wouldn't fly politically, and Sims has already warned that Telstra in its current form wouldn't be able to buy the NBN.

Such is the nature of Telstra and its sprawling business. For every growth avenue Penn explores, there is Rod Sims or an angry politician standing in the way.