Telstra: Where to from here?

The ACCC has blocked Telstra’s (ASX: TLS) plan to acquire small South Australian internet service provider Adam Internet. According to The Australian Financial Review the “deal fell over on Tuesday after nine months in regulatory limbo”.

The deal was blocked because the ACCC said Telstra’s use of its existing network would enable Adam to receive better deals on infrastructure and other costs and therefore get an unfair advantage over rivals such as iiNet (ASX: IIN) and TPG Telecom (ASX: TPG). Telstra said the deal was only a small transaction and quizzed the ACCC over their involvement, to which they replied “it’s small but you’re only doing it to turn it into something huge”.

The ACCC had one key criterion for allowing the deal and it was that Telstra was to put Adam on its structural separation undertaking (SSU). It would mean that Adam would join the rest of Telstra’s businesses in separating its wholesale and fixed retail line businesses when customers are transitioned onto the NBN.

Telstra currently has around 2.6 million broadband customers which generated some $1.6 billion in revenue in 2011-2012 but said it may still consider creating a new low-cost provider. The ACCC has said that although it does not have the power to block a move like that just yet, it would work with the government to change laws to make sure Telstra didn’t get special treatment.

Where to from now?

Telstra’s low-cost growth strategy appeared to be the most obvious move our biggest telco could take to gain an advantage over its peers. Currently and in the past, Telstra has owned all copper wired networks giving it the competitive advantage against its peers, but now the NBN will put everyone on a level playing field, opening up the door to smaller providers like TPG and M2 Telecommunications (ASX: MTU).

Citi research analyst Justin Diddams said it would be more effective for Telstra to focus on cutting costs: “I’d argue addressing the cost base is a far bigger issue than potentially launching a small challenger brand”.

Foolish takeaway

Telstra still remains the most competitive company on mobile and fixed line services and although the company has not been able to complete the Adam deal, there are still a number of other avenues it can take to improve growth. Shareholders know Telstra pays great dividends and provides large amounts of stability in portfolios, making it a great long-term buy and hold stock.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: “Is It Time to Sell Telstra?”

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Motley Fool contributor Owen Raszkiewicz owns shares in M2 telecommunications.

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