Telstra please enlighten us about Sensis

Stan Beer
Wednesday, 09 February 2005 18:00

IT Industry - Development

Dear Telstra, us members of the unenlightened public would dearly like to know what exactly is going through the collective mind of your obviously very astute and worldly board of executive directors. Please believe us when we say that we would really like to know.

We know that you have made mistakes in the past but we acknowledge everyone is entitled to make mistakes. We promise not to dredge up PCCW or Advantra ever again. If you really wanted to spend $1 billion on Trading Post and Kaz, then we’re willing to give you the benefit of the doubt and concede that maybe this time you might have hit the jackpot and made some wise investments – although we have our doubts.

We know that your long suffering and extremely loyal investors, many of whom are the mums and dads of Australia, have yet to see a positive return on the outlay of their hard earned cash. However, despite the fact that your share price remains in negative territory for a significant proportion of them, it is true that you do compensate your investors with a substantial dividend each year. We really should not remind you that world’s most successful investor Warren Buffett believes companies that continually pay large dividends to their investors are generally enterprises that do not know how to invest their profits for a decent return.

All that aside, however, please indulge us when we admit to being somewhat mystified about the latest speculation that you are in the process of spinning off your Sensis business. Now we know that Sensis being essentially a media business may not qualify as a core telecommunications business, but you must admit it is pretty darned profitable and generates healthy cash flow.

Maybe there is something that we outsiders are missing. Perhaps in spinning off Sensis and, in so doing, generating $10 billion in cash, there is something better that you believe you can spend the money on. Maybe you could try to reassert your fast fading PSTN monopoly, perhaps you could try to buy market share from your mobile competitors, you might even put the money into expanding your broadband offering and VoIP applications. However, with your existing cash flow, you could do all these things without selling Sensis.

It is true that if Sensis were spun off and floated it would potentially become a more valuable company than it is as a division of Telstra. What’s more, Telstra shareholders would probably get a significant piece of the action in an upcoming IPO. The question remains, however, is what does the sale of one of the most profitable parts of Telstra do to the rest of the business? The answer is not much good.

Looking down the road, does the Sensis spin-off presage the spin-off of other profitable parts of Telstra, such as mobile communications, Big Pond and maybe even retail fixed line voice telephony? In other words, is what we are seeing the first stages of a break-up of a one-time vertically integrated telecommunications juggernaut into a number of discrete nimble and far more efficiently run smaller enterprises – ala AT&T?

As it stands, shareholders of T1 and T2 have had nothing to smile about. If the Government were to unleash more of the same in the form of T3 on the market in a single tranche, there is no reason to believe the smiles would return. On the other hand, if a number of IPOs of highly profitable discrete businesses hit the market, each unencumbered by competing forces that were formerly within the same organisation, that could enliven the local telecommunications scene considerably. As for Telstra, if you strip away all of its retail businesses, you are left with an organisation that is able to do what it does best – provide the infrastructure and bandwidth for the plethora of telecommunications retailers that continue to proliferate in the Australian marketplace.

Telstra, on reflection, please ignore our original question. We think we may have figured out the answer for ourselves.