The rage building over Telstra

As Telstra shares rise, the battle between Telstra management and its shareholders against the federal government led by Kevin Rudd and Stephen Conroy is at a crucial point. My sense is that the Telstra share price is rising because the market realises Conroy and Rudd have not got the numbers in the Senate. But just as important is the fundamental change that is taking place within the Telstra board and among Telstra shareholders.

The legislation currently before the parliament crystallises the decision Telstra shareholders will eventually have to make. Strip away all the complex clauses and in essence the legislation says that if Telstra does not do a deal with the National Broadband Network then the government can force a functional separation between Telstra's consumer operation and its network, bar it from access to essential wireless spectrum and force it to sell Foxtel (The whole NBN in his hands, February 24; Govt unveils draft legislation on NBN Co, February 24; Wriggle room for Telstra, February 25) .

The Hawke/Keating government and then the Howard government convinced some 1.4 million Australians to pay about $65 billion for Telstra. It is now worth less than $40 billion. While the government actions are not the only forces behind the Telstra share price fall, Rudd and Conroy have been methodically destroying value in the company that the Hawke/Keating government began to sell. In simple terms, Rudd and Conroy believe that a fundamental mistake was made by Hawke and Keating and by the Howard government and that the Telstra network should have been separated from the Telstra consumer business. Now is the time to reverse that mistake, regardless of the cost to Telstra shareholders.

This is new territory for any Australian government and no board or group of shareholders in Australia has ever been put under this sort of pressure. While no one can predict how they will act, there are already some fascinating potential outcomes. First I want to look more closely at the Telstra board. I won't list their backgrounds but the non-executive directors are Catherine Livingstone, Geoffrey Cousins, Russell Higgins, John Mullen, John Stewart, John Stocker, Steven Vamos and John Zeglis.

All but two of those directors were on the board just under six months ago when Peter Willcox was forced to resign because of the court decision in the James Hardie affair. Willcox had been set to be the next Telstra chairman and was one of the most influential Telstra directors. What happened to him in James Hardie had a deep personal effect on all Telstra directors at that time.

They will not risk a repeat of the Peter Willcox situation and therefore will not take personal risks. That's why they have vowed that the decision to accept or not accept a government offer will be taken by Telstra shareholders. Yet Telstra shareholders are among the most angry in the country. Previously their anger was directed towards former CEO Sol Trujillo and former chairman Donald McGauchie. The current chairman Catherine Livingstone and CEO David Thodey have kept a low profile so the anger of the shareholders has switched to Rudd and Conroy.

At some point, Telstra shareholders are going to have to decide whether the cost of not doing a deal with Conroy and Rudd is too high, or, alternatively, whether the cost of doing a deal is too high. Either way, compared to the current situation, they lose.

Leaving aside the recent small rise in Telstra shares on the back of the legislative outcome, Telstra shareholders are in an unenviable position.

At the moment Telstra looks at what the copper network is worth and says: "We want a price that equates to that."

The NBN says: "We do not want to buy your copper network (apart from key parts). Rather we want a Telstra undertaking that wherever we put NBN cables, Telstra will use them and not its copper network."

Eventually the copper in the ground will be useless. NBN says it is not interested in what Telstra thinks its copper network is worth – NBN will only pay at a level that makes commercial sense given the likely revenue.

And that's the essence of the dispute. To have any chance of getting Telstra shareholders to agree, the government must put significant money on the table – but most of the spare Canberra money was spent on the GFC stimulus.

My guess is that the mood of Telstra shareholders is so ugly that in the absence of a much higher bid, Telstra shareholders will tell Rudd and Conroy to go jump. In such a situation, Telstra shareholders will instruct their board to fight Rudd and Conroy each step of the way in the courts. But there is a lot of water still to flow under the bridge.