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How will asbestos harm Telstra?

Following an emergency meeting with politicians last week to discuss the latest NBN controversy, Telstra’s (ASX: TLS) chief executive, David Thodey, has admitted that his company is responsible for the asbestos scandal that has come to light surrounding the project.

The scandal arose after a number of homes were covered in asbestos dust while sub-contractors worked on cable pits owned by Telstra in preparation for the NBN rollout. It is estimated that although 30,000 of the company’s pits have been remediated, a further 1.6 million of Telstra’s pits still contain asbestos.

Whilst Labor leaders have diverted all blame to Telstra as they are the owners of the pits, Telstra has accepted that blame and admitted that it is its responsibility to solve the problem. Meanwhile, unions have reportedly called on the company to create a fund for those affected by the substance, just as James Hardie Industries (ASX: JHX) was forced to establish.

Telstra has been one of the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) top performers over the last year. Its performance reflects its ever-growing dominance in the telecommunications industry against companies such as Optus – owned by Singapore Telecommunications (ASX: SGT) – or Hutchison Telecommunications’  (ASX: HTA) Vodafone business. As such, Thodey has reassured investors that the company faces no financial pressures in regards to costs or payouts to workers affected by the substance.

However, according to Citigroup, it is Telstra’s brand image that could be significantly affected. They believe that in light of the scandal, in which Telstra has been accused of taking shortcuts around the safety of the community, brand damage could cause them to lose market share. In a highly competitive industry, where companies such as iiNet (ASX: IIN) and M2 Telecommunications (ASX: MTU) are closing in on the top performers, the loss of market share could have adverse effects on the company’s shares.

Whilst Thodey doesn’t believe his company faces any material financial risks at this stage, the market appears to have its doubts. Since the scandal broke out, Telstra shares have fallen from their eight-year high of $5.15 to just $4.63 – a loss of 10%. With the market already showing signs of difficulty, it looks unlikely that Telstra’s shares will start climbing until the release of some positive news.

Foolish takeaway

Whilst it is estimated that Telstra has already paid out $30 million in past claims to those exposed to the substance, it could face claims worth tens of millions of dollars due to its mishandling of the substance, as well as costs to fix up the sites. Despite Thodey claiming it won’t put a dint in the company’s financials, based on the size of the project, it doesn’t look as though it’s going to be a quick and easy fix for Telstra.

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Motley Fool contributor Ryan Newman does not own any of the companies mentioned in this article.

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