There are growing calls from some experts for Telstra Corporation Ltd (ASX: TLS) to be split into two companies as its share price continues to flounder at around a seven-year low. Desperate times call for dramatic action and speculation in the Australian Financial Review that investment bankers are working on such a plan certainly fits the bill. The $33 billion question for shareholders is whether this could help Australia’s largest telco to claw back from the near halving of its share price over the past year. It’s suggested that Telstra could keep its infrastructure business that includes its mobile towers,…
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There are growing calls from some experts for Telstra Corporation Ltd (ASX: TLS) to be split into two companies as its share price continues to flounder at around a seven-year low.
Desperate times call for dramatic action and speculation in the Australian Financial Review that investment bankers are working on such a plan certainly fits the bill.
The $33 billion question for shareholders is whether this could help Australia’s largest telco to claw back from the near halving of its share price over the past year.
It’s suggested that Telstra could keep its infrastructure business that includes its mobile towers, data centres and what’s left of its copper network, while divesting its retailing business into a new listed company.
I think such a move will excite the market for two reasons. The first is sentiment as investors love divestments. You only need to look at Wesfarmers Ltd’s (ASX: WES) since it revealed plans to cut the apron strings to Coles supermarkets to see what I mean.
History has shown that most companies that have spun-off part of their business into a separate company have performed well (particularly the new entity).
There are usually a couple of reasons for this, but financial academics will usually cite a more efficient allocation of capital as the top reason.
In Telstra’s case, the capital requirements to run an infrastructure business are different from a customer-facing business.
The idea is that investors who want a steady dividend and are happy to sacrifice growth will stick with the hard asset-rich Telstra, while those who prioritise growth over dividends will want a piece of the service reseller business.
The sales-focused Telstra will also be free to cross-sell a range of products and services from other vendors, and given the size of its database, the strategy could work quite nicely.
The other reason why investors might be excited is because of Vocus Group Ltd (ASX: VOC). Many (including myself) are still haunted by the merger of Vocus with M2 Telecommunications with the latter being a competent reseller and the former bringing infrastructure assets to the marriage.
We all know how that went and I don’t think the culture and core competencies were the right fit. From that perspective, investors may take a favourable view to the idea of Telstra divorcing its sales division.
On the other hand, some may point out that TPG Telecom Ltd’s (ASX: TPM) strategy runs counter to this idea. TPG’s well respected chairman David Teoh is betting the farm on mobile infrastructure, which it is setting up in Australia and Singapore.
TPG made its fortune being a reseller and has only in recent years bought hard assets.
TPG’s share price is also a shadow of what it was 18 months ago, so the jury is still out on whether the marriage of infrastructure and sales in the sector can work.
I suspect we’ll find out the verdict sometime in 2019.
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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, Vocus Communications Limited, and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.