$30b farewell gift from Telstra CEO

The split of InfraCo Fixed has the potential to create a business worth at least $30 billion, considering that it is seven times that of InfraCo Towers. Chanticleer’s $30 billion estimate assumes an EBITDA valuation of 20 times conservative.

Those wishing to judge Penn on the decline in stock prices since his May 2015 appointment should not ignore the brutal external environment in the telecommunications sector during that period.

Scramble for mobile market share

In the last decade, the industrial economy has been very bad. Capital investment in fixed and mobile telephone infrastructure has doubled, but revenues have remained the same.

Some observers will blame this on Penn and its partners, who are involved in the struggle for share of the mobile phone market. Penn made a conscious decision to maintain Telstra’s share of mobile and this helps explain why average revenue per user plunged in the four years leading up to 2020.

Only in the last 18 months to two years the dynamics of the industry have improved. ARPU has increased in Telstra and its competitors. The entire mobile industry is now in a cycle of rising prices.

Penn admitted in a farewell interview ahead of next week’s release of its 2022 financial results that Telstra had grossly underestimated the impact of launching its state-owned wholesale broadband provider, NBN Co.

He said there was a period leading up to its T22 strategy in 2018 when the company’s response to the loss of profits caused by NBN Co was to seek growth in areas beyond the company’s core capabilities.

“We knew NBN would have an economic and operational impact, but we were looking too much at external sources of growth to compensate,” he said.

Penn lists a number of failed investments, including the purchase of video streaming analytics firm Ooyala. It cost about $500 million and was later reduced to zero.

Another endeavor called growth assets is investing in software and healthcare companies.

Penn said that while Telstra Health is “in a good place right now”, it and other investments “divert the company’s attention from actually addressing the core issue, which is that we have to fundamentally change the telco’s core business”.

His wake-up calls about the importance of the core telecommunications business came with a series of outages in fixed and cellular services culminating in a May 2016 outage.

The outage prompted Penn to invest $3 billion in the network.

Its T22 strategy fundamentally changes the way Telstra approaches technology investment. Also, as the creation of InfraCo Towers and InfraCo Fixed demonstrated, Penn recognized the need to unlock value.

More efficient structure

His tenure was accompanied by a cost-cutting program that cut the number of employees. In 2015, there were 36,000 permanent employees and 38,000 contractors. Today, there are 26,000 full-time employees and 19,000 contractors.

The move to a more efficient corporate structure is critical, as the arrival of NBN Co erased $3.6 billion from Telstra’s EBITDA.

Penn said the magnitude of the blow to Telstra’s profits was even greater when viewed through a net profit lens. This is halved as Telstra maintains capital-intensive assets that require depreciation and amortization.

Penn joined Telstra as chief financial officer in March 2012 and in May 2014 he added an international group executive role.

One of his lesser known achievements was to renegotiate Telstra’s commercial relationship with Murdoch’s Foxtel. This is a masterclass in deal making.

Telstra owns half of Foxtel, a business with a lot of debt and little income, while Murdoch enjoys the profits of Fox Sports. He traded it for 35 percent of Foxtel and Fox Sports combined while forcing Murdoch to take on debt.

Penn will retain his role as chairman of the federal government’s Cyber ​​Security Advisory Committee.

His tenure at Telstra includes one of the most significant steps by an Australian business into diplomacy and government policy, through the purchase of Digicel, a mobile provider in the Pacific.

Telstra contributed $US270 million ($385 million) of equity for a purchase price of $US1.6 billion.

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