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A Parachute for Telstra Shareholders

It's curious that Telstra's share price took a hammering after the signing of the NBN agreement, when really it should be a boon for shareholders.
Let's face it, Telstra shareholders were sold a dud. At each round of sales, people paid top dollar for shares, thanks to some compelling government advertising. Yet Telstra was facing the same regulatory environment that BT had seen in Britain. The sell-off process over there started in the '80s, with the government losing its majority shareholding in BT in 1984.

By 1992, BT was making £12 billion a year --- about £200 for each person in the country. At the same time Telstra was raking in almost $20 billion --- about $1,100 per person. It was obvious that something had to give, but share buyers appeared blind to the inevitable.

From 1992 onwards, the differential continued to grow. The privately owned BT saw revenue and profits plateau, whilst Telstra continued to take advantage of its dominant position, with revenue growing 50 percent in real terms over the next eight years.

Clearly, when it came to sale time for Telstra, you didn't have to delve too deeply to see what the future held for an incumbent telco in an increasingly competitive and regulated environment. BT was giving all the answers. Yet the Telstra share price was driven up in a frenzy of excited buying. By January, 1999, Telstra shares had risen to $9, high enough to inflate the price for the second offering. As many will be painfully aware, these days Telstra shares are rarely above $3. Lots of people lost money because financial advisors chose to ignore the warning signs and talked up the stock.

Now Telstra and BT are on the same flat trajectory. When, if ever, will they see revenue and profits rise again? When you once owned so much of the market, profits tend to go only one way: down. So one would think have thought last week's deal with NBN Co would be a rare glimpse of good news. Telstra secured a slug of money from the government ($9 billion post-tax NPV) for handing its customers over to the new national broadband network. It was being compensated for customers that it would slowly lose over time anyway.

So why did the share price fall? Maybe it's because investors realise the telco has little influence on its own future beyond being a good retail provider. BT is a vertically separated company, which means it has retained its wholesale division, which must provide equal access to all retail providers. It might not have enjoyed a $9 billion handout from the government, but its shareholders will benefit from the company's relatively moderate £1.5 billion investment in rolling out fibre to 10 million homes in time for next year's Olympics. That seems like a lot of infrastructure, installed in a short period of time, and for very little money.

Perhaps shareholders have lost their enthusiasm for their Telstra shares because they realise the opportunity to move quite so swiftly, at least in terms of fixed-line access, has been taken away from them. The government handout was a parachute for a falling share price, but parachutes always slow things down.

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Read more By The Numbers articles by Phil Dobbie here.