Telstra yet again

A really good short article by Stephen Mayne appeared in the Crikey emails this week (no URL to link to, sadly, so I’ve got to quote lumps of it).

After yesterday’s doom and gloom profit warning from Telstra, does anyone really think the government has a hope in hell of getting T3 away at the budgeted price of $5.25 a share? Terry McCrann got it absolutely right in today’s News Ltd tabloids when he wrote: “The core reality of and challenge for Telstra as a business is actually very simple. It’s a fabulous 20th century monopoly living in the 21st century.”

Here’s a table of Telstra’s PSTN (the old fixed-line business) revenue over the past 5 years, including a projection for the current year based on comments made by CFO John Stanhope predicting a 6.8% drop in 2005-06, following the unprecedented 3.4% fall in 2004-05:

2001-02: $7,755m
2002-03: $7,916m
2003-04: $7,984m
2004-05: $7,709m
2005-06: $7,185m (f)

Telstra has long used its fixed-line business for gouging to keep its already fat profit margins high, but those two ACCC-approved increases in monthly line-rental charges now look absolutely disastrous. Customers are leaving in their tens of thousands.

We’ve got 3 fixed lines in the old Crikey bunker which cost us $90 a month in rental fees. We’ve just cancelled one this morning on reading that everyone else is sick of being ripped off and is going without. Why don’t you try the same? Mobiles are so cheap these days that you don’t really need a landline.

Whilst Telstra is enjoying good growth in mobile and broadband revenue, these are subject to intense competitive pressures which don’t allow for the same monopoly profits that flow from the rapidly declining fixed-line business.

At last glance, the telco’s share price was languishing at $4.76, down 9c. Several major analysts have downgraded their outlook on the stock and Merrill Lynch has slapped it with a rare sell recommendation.

Knowing all this, who’s going to pay $5.25 a share for a slice of a declining business? The government will do well to get $4.50 a share which is only $29 billion and then you’ve got the billions that will be diverted to improve services in the bush and the shares that will be put directly into the Future Fund. With Telstra contributing $2 billion-plus to the Federal budget in recent years, Peter Costello is facing a black hole from T3 process.

With so many Australian investors still upset about being dudded on T2 at $7.40 a share, the government and its army of highly-paid advisors will have their work cut out getting T3 away. Even if it does get Senate approval, will the government sell at any price?

Then again, if the regulatory framework is as light-handed as it is in the banking sector, T3 could be a good buy if a fully privatised goes hell for leather slashing costs, withdrawing regional services and jacking up prices where it has market power.

After all, the Howard Government sold a majority stake in the Commonwealth Bank for just over $10 a share in 1996 and then did nothing as it abandoned the bush and gouged the bejeezers out of its customer base. The CBA is now pushing $50, but it’s hard to imagine Telstra shares being sold for $5 and then rising by 500% to $25 over the following 10 years.

Sadly, Telstra’s glory days are behind it and the government is about to attempt selling a flea-blown dog to a sceptical public. Buyer beware if the final sale price begins with a 5.

I’d add that as the same time as this is going on, the government is hell-bent on adding more regulation to Telstra, and deliberately setting out to cripple its business. Some of this is called “accounting transparency” – jargon for telling your competitors exactly what your costs AND MARGINS are so they can undercut easily. Some is plain old pork-barrelling, and some is just pig-headed political ideology.

Mr Howard and Mr Costello: I’ll walk over hot coals barefoot before I buy another Telstra share from thieves the likes of you.

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