Australia - the future of Telstra

Broadband plan could force Telstra split

The largest Australian telephone company, Telstra, could be split up if the government goes through with a threat to bypass the company in building a $6.9 billion national broadband network.

Telstra has been shut out of the planning and if the project is granted to a rival, it could see its network arm forcibly separated to provide a platform for the network.

Analysts say uncertainty over the ability of Telstra's rivals to build a network spanning Australia's vast distances and inhospitable terrain and reaching the government target of 98 percent of the population means units of Telstra must be involved.

"This requires parts of Telstra's network, and if they're not prepared to provide it willingly, then it will have to be legislated," said Luke Sinclair, an investment manager at Karara Capital.

Australia has slower and more expensive Internet than many other developed countries, and the government has pledged 4.7 billion Australian dollars, or $3.2 billion, to help build a national broadband network, with the successful bidder expected to provide approximately the same amount.

But the project has been beset by political wrangling, descending into a confrontation between the government and Telstra, which dominates the market and infrastructure.

A government panel reviewing proposals for the network Dec. 18 dumped Telstra's plan because it did not include smaller businesses, while accepting five other bids.

"This decision reveals fundamentally a growing level of frustration from the government with Telstra's very public demands and ultimatum for regulatory concessions," a JPMorgan analyst, Laurent Horrut, said in a note to clients.

Telstra had sought assurances from the government that it would not be forcibly broken up. The government responded by saying the network could be built without Telstra.

Telstra could still be selected, however, if the minister for broadband, Stephen Conroy, who will make the final decision, decides to ignore the panel's recommendation.

Of the five other bidders who registered interest, Telstra's main rival, Optus, owned by Singapore Telecommunications and backed by a consortium of smaller players known as Terria, is seen as the most likely candidate.

While doubts persist about whether anyone but Telstra can muster the estimated 5 billion dollars needed on top of the government's contribution, a joint venture could be the solution.

"Even if you have one leading tenderer, let's say Terria, it would be possible for them to work with other players to get it built," said Paul Budde, an independent telecommunications analyst.

Alternatively, the government may adjust how much it is willing to contribute to the project to support a less capable bidder, said Sinclair of Karara Capital.

Besides the Optus-Terria consortium, the other bidders include Axia Netmedia of Canada and a local consortium, Acacia. TransACT and the Tasmanian government have submitted plans only for their state, not national plans.

The credit rating agencies - Moody's, Fitch and Standard & Poor's - maintained their Telstra ratings despite the government decision, with all three saying it was too soon to say what the effect would be on the company if it was left out. That is partly because the process could become mired in legal challenges, resulting in delays. Telstra has called the decision to exclude it from the bidding "legally questionable" and has reserved the right to challenge it.

Telstra shares, which fell almost a fifth to an 11-year low after the decision, have recovered some ground after the company said its earnings outlook would not be affected.