Australia to break up Telstra

Dominant telco must split wholesale and retail businesses

SYDNEY -- A 50% stake in Australian pay-TV giant could be up for grabs if the federal government sees through plans to break up local telecom giant Telstra Corp. into separate wholesale and retail arms, the Communications Ministry announced Tuesday.

“The Government intends to correct Australia’s unique and highly-integrated market structure by preventing Telstra from acquiring additional spectrum for advanced mobile services unless it structurally separates, divests its HFC [hybrid fiber coaxial] cable network and divests its interests in Foxtel,” communications minister Stephen Conroy said, announcing the reforms package.

“Telstra is one of the most highly integrated telecommunications companies in the world across the fixed-line copper, cable and mobile platforms. The reforms address the structure of the telecommunications market and provide Telstra with the flexibility to choose its future path.”

“It is designed to promote competition by addressing the underlying incentives for the incumbent to favor its own retail businesses over its wholesale customers,” he added.

Foxtel, currently owned 50% by Telstra Corp., 25% by James Packer’s Consolidated Media Holdings and 25% by News Corp., is one of the country’s most profitable media businesses. It counted 8% growth in subscribers to 1.63 million in the last financial year, with revenues of AUS$1.84 billion ($1.5 billion), an 11% increase on the prior year.

The announcement of reforms and the requirements for Telstra’s structural separation comes as the government enters into negotiations with Telstra about its involvement in plans to build the government-backed AUS$43 billion ($36 billion) National Broadband Network.

It also comes just four days after media moguls James Packer and Kerry Stokes entered into a separate agreement over Packer’s pay-TV investment company Consolidated Media Holdings.

Stokes, majority owner of the Seven television network here has quietly built up a 19.9% stake in CMH in recent months. Last week Packer agreed to give Stokes two seats on the CMH board if Stokes agreed to a 12 month freeze on any further acquisition of CMH stock.

Analysts said that Stokes' of 19.9% investment in CMH was an attempt to ensure he had a seat at the table in the event of a carve-up of Foxtel.

Telecommunications analyst Paul Budde said that a forced sale of Telstra's stake in Foxtel could start a fresh media bidding war involving Stokes, Packer and News Ltd.

"Definitely there are new opportunities and I think that's where Seven, Kerry Stokes in particular, but also I'm 100% sure News Ltd. will be very interested in actually starting to have a look at that."

However Ovum Consulting research director David Kennedy said he didn't expect Telstra to have to divest Foxtel.

"If they do the right thing and separate their network, there's no real reson why they would get rid of Foxtel," he said.

Telstra chief executive officer David Thodey said that the company was disappointed in the Government's proposed regulatory reform package.

"While we are disappointed the government has felt it necessary to introduce this legislation, Telstra remains committed to working with the government to find a solution that is in the best interests of the industry, the nation, Telstra and our shareholders," Thodey said.

"It is Telstra's view that many aspects of this package are unnecessary and need never be implemented if a mutually acceptable outcome can be reached on the National Broadband Network. Telstra supports the Government's NBN vision. We are willing to discuss options around separation.“
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