This Post Market Wrap is presented by KOSEC – Kodari Securities
- Legal restructure formalises separate ownership of infrastructure assets in new entities
- Restructure creates optionality to monetise embedded value in privileged infrastructure assets
- Strong global demand exists for mobile tower assets at compelling valuations
- Telstra International to be established, with a focus on subsea cables
- Global demand for high quality telecommunication infrastructure assets supports long term shareholder value accretion.
Telstra legal re-structure
Telstra is on track to finalise its legal restructure over the course of 2022, which will see the establishment of a new parent entity, to be known as Telstra Group Limited. Telstra shareholders will receive one new Telstra Group Limited share for each of their existing Telstra Corporation Limited shares. The legal restructure will result in the transfer of assets and liabilities between various entities within the Group. The transfers will be effected by a Scheme of Arrangement, which requires Court approval before the changes can be implemented.
The restructure is much more than a variation to Telstra’s name; it is a fundamental change that responds to a rapidly evolving telecommunications industry driven by digitisation, analytics, Artificial Intelligence, and related technology network ‘smarts’, as well as unlocking the inherent value embedded in Telstra’s privileged assets. These key essential assets include the towers, ducts, fibre, data centres, subsea cables and exchanges that support Australia’s leading telecommunications network. The restructure is a complex process and the most significant corporate change since privatisation.
A key outcome for shareholders is that the restructure should enable a higher overall market value to be attributed to the Group by improving visibility and returns on essential fixed assets with monopolistic style characteristics and value. This is because Telstra’s infrastructure assets have identifiable, contracted, long term, recurrent and low-risk cash flows. These assets, on a standalone basis, autonomously managed by a separate leadership group, should release value to shareholders over time. While not explicitly stated by Telstra’s management, the legal and structural separation of key monopolistic style assets provides optionality for the sale or separate ASX listing of these assets. Given their reliable cash flow and low risk profiles, compared to other service-oriented parts of the business, a standalone entity comprising these assets is likely to command a premium valuation by global investors.
Four Standalone Business Units
Once implemented, Telstra’s legal structure will comprise four main operating entities:
- InfraCo Fixed
- InfraCo Towers
- ServeCo
- Telstra International.
InfraCo Fixed will own and operate Telstra’s physical infrastructure assets. These assets include ducts, fibre, data centres, and exchanges.
InfraCo Towers will own and operate Telstra’s mobile tower assets. It is these assets that have the market keenly interested, given the strong demand and compelling valuations for this type of high-quality infrastructure.
ServeCo will maintain Telstra’ focus on products and services, including the radio access network and spectrum assets that are mission critical to the Group’s mobile coverage and network superiority.
Telstra International will be established as a separate subsidiary within the Group, with a focus on subsea cables.
Intercompany Agreements have been created between the infrastructure owners (InfraCo Fixed and InfraCo Towers) and ServeCo that support sustainable earnings for each of these entities and preserve shareholder value at the Group level.
Looking Ahead
The legal restructure terms, once approved by the Court, will be put to a shareholder vote to ratify the Scheme of Arrangement. The Scheme Booklet outlining the restructure terms is expected to be available to shareholders in September 2022. Depending on the date of the shareholder meeting to vote on the restructure, the exchange of new shares in Telstra Group Limited is expected to occur by the end of October 2022.
For now, investor focus is less about the state of the business today and more about how well positioned Telstra is for the future. The digital economy is the future and its dependence on a reliable, technologically superior telecommunications platform is fundamental to the vibrancy and productivity of the Australian economy.
The legal and physical restructure of Telstra is right for the times and with the increasing value of infrastructure assets globally, the soon to be re-named Telstra Group Limited, is well placed to deliver shareholder value accretion over the long term.
This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.