Telstra : Philippines setback unlikely to halt telco’s Asia drive

Telstra boss Andy Penn suffered a setback in his Asian growth plans a few days ago — and investors reacted by pushing up the company’s share price.The telco announced it would not go ahead with plans to build a mobile phone network in the Philippines with beer giant San Miguel.Telstra was to have committed A$1.3 billion ($1.4 billion) to the deal in an attempt to gain a major position in a quickly developing market. Once it was announced that the deal had fallen over, Telstra shares quickly shot up 2 per cent as risk-averse investors breathed a sigh of relief.True, building a telephone network with a beer company does on the face of it sound like a plan hatched by Barney from The Simpsons. And the deal was not without risks – there is always the chance of major cost blowouts and delays when builders get involved in anything and Telstra would have been a minority shareholder with just 40 per cent and all the lack of control that implies.But the deal also had great potential.The World Bank describes the Philippines as one of the most dynamic economies in the East Asia region, with sound economic fundamentals. It has robust economic growth, low and stable inflation and sustainable government spending.Spending a bit over a billion dollars to roll out a much-needed high-speed mobile broadband network to the Philippines’ 100 million people seems like a pretty good bet. The two existing mobile networks there aren’t up to scratch so there is certainly room for another player.It’s not clear why the Philippine deal fell over — Telstra isn’t saying so it’s an unanswered question.This gives rise to another unanswered question for Telstra: where is the growth going to come from?Shares in the company are languishing at two year lows as investors ponder the answer to this question. Deutsche Bank is tipping Telstra’s revenue will grow just 3 per cent over the next 12 months.A look at how Telstra’s revenue mix has changed over the past eight or nine years highlights the problem. In 2007 fixed line revenue made over 40 per cent of the company’s income, now it’s down below 30 per cent. Its international call revenue has fallen by more than half.Mobile used to make up around a quarter of the company’s revenue in 2007 and now makes up 40 per cent. The problem with this is that mobile calls and texts are highly commoditised offerings and don’t have the potential to generate much profit growth.Adding to Telstra’s woes is the outage its mobile network suffered on Thursday night, leaving millions of customers without working phones. (It was like being back in the 1970s.) It’s the third time in a month that Telstra’s mobile network has malfunctioned.Consumers pay a premium to subscribe to Telstra’s mobile network on the basis of its reputation for reliability. Too many more outages like last week’s and they’ll start migrating to some of the discount providers.Telstra is pinning a lot of its hope on data sales, but its internet offerings are under attack from the government-owned National Broadband Network, which is slowly rolling out around the country and will give equal access to all internet companies to resell its services — unwinding the major advantage Telstra has had in owning its own network.All of this makes Asia look like a pretty good option.Telstra already earns 10 per cent of its revenue from Asia and the company has previously set a target to earn about a third of its profits and revenue from the region in the next four or five years.It looks like the Philippines setback was nothing more than that, certainly not a change in strategy. In a tweet soon after the deal fell over Penn said Telstra would continue to pursue growth opportunities in Asia.And it looks like it will soon have a much bigger war chest with which to make Asian investments and acquisitions.The company is said to be considering a A$4.5 billion float or sale of its half share in pay TV provider Foxtel. This is another technology business whose profitability has been eroded by technological change — in this case internet streaming by the likes of Netflix.In looking to sell this business, Telstra is signalling that it won’t hold onto legacy assets if they’re not producing growth.The company will come under a lot of pressure to return as much as it can of that A$4.5 million (and the A$1.3 billion it is no longer spending in the Philippines) to shareholders.It will be a test for Penn to see how much he can resist that pressure and stay true to his Asian growth ambitions. If he does, the rewards for Telstra and its shareholders could be substantial.Copyright © 2016 The New Zealand Herald. All rights reserved., source Newspaper

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