Telstra's telling tidy up

With the sale of TelstraClear in New Zealand, Telstra has signalled its determination to refocus, refine and perhaps yet grow its portfolio under the new capital management framework.

David Thodey, with the historic $11 billion national broadband network now behind him, is moving methodically to tidy up and focus Telstra’s portfolio. The $660 million sale of TelstraClear is an indication of the new disciplines being brought to bear.

Telstra confirmed more than a month ago that it was in talks with Vodafone New Zealand about the potential sale of its New Zealand business, the second-largest (behind Telecom NZ) fixed line operator in that market.

The only surprise today was the price – the market had thought around $400 million would be an excellent outcome. Apart from the $660 million sale proceeds Telstra will also extract $380 million as a pre-completion dividend, although that cash was already consolidated in Telstra’s accounts and therefore, unlike the sale proceeds, doesn’t add to the $2 billion to $3 billion of excess cash Telstra expects to generate over the next three years.

TelstraClear and Vodafone are challengers to Telecom NZ, with TelstraClear focused on fixed line infrastructure – it has HFC cable, metro and fibre backhaul networks and significant amounts of wireless spectrum, although it operates as a re-seller of Vodafone’s mobile services.

Given the relative modest size of the NZ telecommunications market and its relatively modest growth rates, it has always made sense to merge TelstraClear’s fixed line business, which has a market share in the mid-to-high teens, with Vodafone’s wireless-dominated business. It was just a question of who would be the consolidator and it appears Telstra came to the conclusion that Vodafone wasn’t a seller.

In the context the sale itself isn’t as material as the message it sends.

In April Telstra’s newly-appointed chief financial officer, former AXA Asia Pacific chief executive Andy Penn, outlined the capital management framework the group would use to determine how to deploy its excess cash and capital.

While the market has tended to view that framework as a lens through which Telstra will decide whether to make accretive acquisitions or return excess capital to shareholders through higher dividends or buybacks, the TelstraClear sale signals that it is also going to be used to screen the existing portfolio.

There are other discrete or non-core assets in the Telstra portfolio – Sensis and the CSL wireless business in Hong Kong are two of the most obvious – which would presumably also be put under the new microscope the framework provides.

The better-than-expected outcome and the capital management disciplines it demonstrates would be contributing factors to the continuing rise in Telstra’s share price today.

Telstra will still need to demonstrate that it does have a growth strategy beyond its future as a retailer leveraging off the NBN and a wireless operator but Thodey and his team are making it clear that they are committed to a very rigorous approach to managing and deploying the war chest of excess cash and capital the group is accumulating.

The market is becoming more confident that the torrents of cash that will flow to Telstra if the NBN continues to be rolled out won’t be dissipated through acquisitions for acquisition’s sake. The TelstraClear sale will buttress that confidence.

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