But what's Telstra going to do with the money?

Telstra could reap up to $100bn from the NBN thanks to a shrewd David Thodey. Before moving on from the telco, he'll want to ensure he leaves behind a legacy of growth.

Stephen Conroy must have read Bill Scales’ ‘independent audit’ of his National Broadband Network process this week with a mixture of snarling irritation and nostalgia for those heady days of 2009 and 2010, when nothing mattered but dreams of fibre and shafting Telstra.

Ah, the thrilling race to rebuild Australian communications, when anything seemed possible, and bugger the consequences -- all laid out in predictably excruciating detail by Bill Scales.

History, as Churchill said, is written by the victors. If Labor had won in 2013 we might have remained contentedly unaware of the cock-up that was the NBN, except that the whole thing probably would have imploded, mysteriously.

Anyway the past, to quote LP Hartley this time, is a foreign country -- they do things differently there.

Telstra was not shafted and in fact always held all the cards. In May 2009, new chief executive David Thodey picked up the poker hand from Sol Trujillo and started playing.  Six months later terms of engagement were agreed, six months after that a non-binding heads of agreement was signed, when the figure of $11 billion to be paid to Telstra was first revealed, and then a year after that, two years after the game commenced, a ‘binding definitive agreement’ was finally signed.

The $11bn is net present value. The actual money to be paid to Telstra under that agreement is closely guarded but will amount to at least $50bn. Some have put it at $100bn. Let’s call it a lot more than $11bn.

Under the new Minister for Communications Malcolm Turnbull’s own policy process, which will no doubt be unsympathetically scrutinised by a future Labor government, the 2011 agreement is now to be replaced by another one that will involve the NBN acquiring Telstra’s copper network as the basis for a cheaper network of fibre to the node.

Telstra will get the same cash or more, possibly earlier.

The question at hand is what will Telstra do with the money? This is a line of inquiry that’s significant not just for Telstra shareholders, who bought the business from the Government of the day for some $39bn and are now selling a part of it back for more than that on a time-payment plan.

It’s also an important question for the nation, on several scores. If Telstra uses it to keep or enhance its dominance, then part of the purpose of the NBN will have been subverted. If the money is returned to shareholders, they will presumably re-invest it. If it were wasted by Telstra then that would be a pity, if not a disgrace.

Perhaps the first question is whether David Thodey will be the one to decide this, or rather recommend to the board.

He’s now been CEO for five years and three months, which is an average sort of duration for any big company – longer than Trujillo, shorter than Switkowski. Deciding to spend more time with his family now would certainly not be regarded as premature, or the action of a quitter.

But I suspect spending $50bn or so transforming Australia’s largest industrial company will prove irresistible: he will stick around at least long enough to set the company’s course and entrench his legacy.

Fund managers are already baying for ‘capital management’, which is code for giving the money to them. But that’s unlikely in my view. There are almost no franking credits left for a special dividend and a capital return would be an admission of defeat -- that Thodey and his high-paid team couldn’t come up with anything to invest in.

In my view Thodey will look to spend the money buying growth. If he resigned now, Thodey’s period would be described as nothing more than solid. He improved its customer focus, maintained the dividend and grew the share price and negotiated That Deal with the Government.

No, David Thodey will want to leave something exciting behind – a legacy of growth, not boring, lucrative stability. But whenever you ask someone at Telstra what the money will be spent on and where growth will be found, they start burbling about e-health and pretending they know what they are talking about.

Indeed there do seem to be some opportunities in bringing the modern world of software and communication to medicine, but it seems to be a fragmented and difficult area of endeavor. It may be possible to bring Google-like scale to e-health, and to take it global, but that seems unlikely, and at best slow and risky.

Telstra’s current strategy of buying lots of little businesses is a train to nowhere. Before you know it, the money is gone and all you’ve got to show for it is a bag of small entrepreneurial businesses that are dying because of the dead hand of Telstra’s bureaucracy.

Telstra’s culture -- its main skill-set as they say these days -- is domination. It is good at being large and powerful, at exercising the benefits and prerogatives of scale, and bad at being small and nimble.

For that reason, Telstra must make a big takeover. No point fooling around. And there’s nothing much in Australia, unless the company diversifies by buying, say, a big retailer like Woolworths, or perhaps the ASX.

To stay in what it knows, Telstra needs to make a significant acquisition offshore. An Asian telco? It tried that and didn’t really work.

Actually I think Telstra should take this opportunity to really leapfrog into the 21st century by buying Twitter Inc, capitalised at $27bn. Now, that would be transforming.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles