Australia - breakup of Telstra?

Telstra faces break-up pressure

Australia's dominant phone company, Telstra Corp Ltd, is set to come under government pressure to split up its business units along the lines of similar break-ups of phone companies in New Zealand and the UK in recent years.

The separation of Telstra's network from its retail and wholesale units is seen as one solution to help break an impasse over building a A$9.4 billion ($8.7 billion) high-speed broadband network.

It would open up competition to main rival Optus, owned by Singapore Telecom, and a range of smaller players, eroding Telstra's market share and margins and likely sending its share price sharply lower.

"From the government's point of view, there is a reasonably strong case to impose operational separation on Telstra," said JP Morgan analyst Laurent Horrut. "If you look at the history of this sector in Australia, the reality is the fixed-line network has not delivered a competitive market."

There is a growing push globally to split telecom operators into business units, with the European Union considering legislation to do just that despite opposition from big telcos such as Deutsche Telekom and France Telecom .

In an acrimonious debate between Telstra and its competitors, calls for Telstra to sell off its phone network to another company or run it as a stand-alone business unit have mounted as a government plan to invite bids for a new fiber broadband network has met with delays.

Telstra has aggressively denounced any need to separate its business units.

"Our CEO is on the record that any further separation of Telstra would mean we would not participate in a national broadband network," a Telstra spokesman said.

Analysts say an asset sale is not likely, but the former government monopoly could be forced to split its operations to boost competition and push down prices of internet services.

Telstra still has 70 percent of total industry revenues in the fixed-line market and a 48 percent market share in broadband, which analysts say clearly shows it remains dominant.

Bringing Australia up to international broadband speeds was a key policy platform for the Labor government, elected last November. Bids for a fiber network were originally due on July 25, but the government is still awaiting network information from Telstra.

The government will fund A$4.7 billion for the network, which it wants the winning bidder to match. But Telstra says the cost could escalate to A$15 billion or A$25 billion to reach the planned 98 percent of Australia's sparse population.

A government decision on a possible split could come late this year, but the battle could drag into 2009 if Telstra fights the move in court.

Separation of Telstra would probably follow the model of New Zealand Telecom (TEL.NZ: Quote, Profile, Research, Stock Buzz) or British Telecom (BT.L: Quote, Profile, Research, Stock Buzz). Neither was required to sell assets, but strict regulations were imposed to open up the phone network to competitors.

Telstra's rivals say it is the only way to ensure a level playing field.

"There's a lot of anecdotal evidence that alternative carriers are being frustrated in getting access to the network at the moment," said Fortis Investment Partners analyst Theo Maas.

Giving regulators the power to split up Telstra could help break the deadlock and ensure equal pricing for rivals -- the key issue that stalled a previous Telstra broadband plan last year, after two years of haggling over prices.

"Operational separation is the most important negotiation tool for the government to keep Telstra in line in terms of access pricing," said Fortis's Maas.

A split would erode Telstra's market share in broadband and could hurt its high margins. Similar worries sent Telecom New Zealand shares diving 20 percent after its split was announced, and JP Morgan estimates a split would knock some A$0.93 cents off Telstra's share price valuation, now around A$4.53.

"There will be a short-term problem for the incumbent because they will have to go from monopolistic rents to market rents," said independent telecoms analyst Paul Budde.

"In every country in one way or another the conclusion is, if you want to deliver services such as health and education, then you have to go for open networks to make it affordable. I can't see any other way forward than separating the infrastructure from the services."