Telstra (ASX:TLS) splits into three under radical business restructure

• Telstra (TLS) has flagged a major corporate restructure as it plans to split into three separate businesses under the Telstra Group umbrella
• The telco giant will be splitting its InfraCo business into two separate entities called InfraCo Fixed and InfraCo Towers
• A third business will be added to the mix, dubbed ServeCoServeCo, which will focus on the active parts of the Telstra network and customer service
• Telstra CEO Andrew Penn says this is the biggest change to the business since the government started to privatise the company in 1997
• Alongside the business restructure announcement, Telstra reaffirmed its 2021 financial year guidance to investors today
• The company is expecting total income to be between $23.2 billion and $25.1 billion for the financial year
• Investors liked today’s news, with Telstra shares up 3 per cent this afternoon and worth $3.08 each

Telstra (TLS) has flagged a major corporate restructure as it plans to split into three separate businesses under the Telstra Group umbrella.

The telco giant announced the business shakeup in an investor presentation this morning and said it is the most significant change to the company since 1997 when the government started to privatise Telstra.

The three-way split

The company plans to create three separate businesses by splitting its InfraCo segment in half and adding a specified customer support and services business into the mix.

InfraCo was established in 2018 as part of Telstra’s T22 transformation strategy, which saw the telco fork out $600 million of restructuring charges and cull around 800 jobs, among other big changes.

InfraCo is Telstra’s standalone infrastructure business designed to serve three key business segments: wholesale in Australia, the rollout of the National Broadband Network (NBN), and the broader Telstra organisation.

Now, InfraCo is being split into two businesses: InfraCo Fixed, focussed on passive or physical infrastructure assets like fibre, data centres, and subsea cables, and InfraCo Towers, which will own and operate Telstra’s physical mobile towers.

To complement this, Telstra will launch ServeCo, which will focus on the active parts of the Telstra network like radio access, mobile coverage, customer service, and product innovation.

“The proposed restructure is one of the most significant in Telstra’s history and the largest corporate change since privatisation,” Telstra CEO Andrew Penn said.

“It will unlock the value in the company, improve the returns from the company’s assets and create further optionality for the future,” he said.

Andrew explained that the challenges faced across the globe by the onset of COVID-19 reinforce the increasing value of infrastructure assets, the importance of a digital economy, and the dependence on telco for this digital economy.

“Our proposed new corporate structure reflects this new world and will help us support the foundation for it — one that is in the interests of our shareholders, our employees, our customers, and ultimately one that benefits the country overall,” Andrew said.

Guidance affirmation

Hand-in-hand with the radical corporate restructure, Telstra reaffirmed its 2021 financial year earnings guidance from August, when the company predicted total income to be between $23.2 billion and $25.1 billion for the year and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) between $6.5 billion and $7 billion.

Andrew told shareholders today the NBN rollout is effectively complete and Telstra is more than halfway through its T22 strategy.

The company told investors it plans to deliver EBITDA between $7.5 billion and $8.5 billion in the 2023 financial year, though it is not ambitious enough to confidently say it can reach this target.

“While we do not provide financial guidance beyond the current financial year, our board and management team understands the importance of achieving EBITDA in this range and the actions required to deliver it,” Andrew said.

“If we are successful in getting into the bottom end of the $7.5 billion to $8.5 billion underlying EBITDA range by Fy23, this would equate to an estimated return on invested capital of close to 8 per cent,” he said.

Investors liked the business update, with Telstra shares spiking in early action and maintaining a 3.01 per cent gain over the afternoon. At 2:44 pm AEDT, Telstra shares are worth $3.08 each.