TELECOM GIANT WILL NEGOTIATE, UP TO A POINT

UNCLAS CANBERRA 000878 SENSITIVE SIPDIS WHITE HOUSE FOR USTR, DEPARTMENT FOR EAP/ANP, EEB/CIP E.O. 12958: N/A TAGS: ECON ECPS ETRD AS SUBJECT: TELECOM GIANT WILL NEGOTIATE, UP TO A POINT REF: CANBERRA 856 ¶1. (SBU) SUMMARY: Australia's largest telecommunications company Telstra is open to negotiate its own restructuring with the government. The government needs Telstra's network infrastructure in order to move forward with its ambitious telecom modernization plan. Telstra, however, will require compensation and protection of its share value as part of any agreement. End summary. ¶2. (SBU) Econoff met with Telstra's head of government relations Tony Warren on September 21 to discuss the company's position vis a vis the Australian government's latest ultimatum for Telstra to voluntarily restructure or face a forced "operational separation" (reftel). Warren explained that last week's announcement revealed the government's initial, and ideal, negotiating position and said that Telstra had "frankly prepared for worse." He confirmed Telstra's surprisingly less-than-combative public reaction to the government's threats, saying they partly reflect the fact that the company is confident it knows the government's position and has "calculated all the numbers." ¶3. (SBU) According to Warner, the GOA essentially needs to buy out the company's copper network, which reaches most of the nation's homes, schools and workplaces. The government's National Broadband Network plan could become prohibitively expensive without Telstra's network. Warner said a gradual shut down of its copper network and transition of that network's customer base to broadband between now and 2018 is a possible scenario that could be negotiated, but he stressed that the government must make it "worthwhile." In other words, Telstra expects the GOA to guarantee the maintenance of the company's share value through the transition, by paying a mutually-agreed valuation of the cost of that transition. Warner added that reaching such an agreement will be difficult, emphasizing that if shareholder value is put in jeopardy, CEO Thodey will not hesitate to walk out of the negotiations. ¶4. (SBU) Warner said another reason for Telstra's resigned attitude toward negotiation is Telstra's new CEO David Thodey's approach, which is much more conciliatory toward government and in deep contrast with former CEO Sol Trujillo's fierce anti-government regulation campaign. Warner sees Thodey's positive image as a negotiating advantage and posited that his approach could turn public opinion against the government, especially if the GOA were to overextend its hand by negatively portraying Telstra as a "large mean monopoly that must be broken up" -- conceivably making Telstra look more like the victim. ¶5. (SBU) Comment: Both Telstra and the government seem well in their way to engaging in negotiations, yet "the lines in the sand" are becoming clearer. While Warren did not reveal what exactly the company is willing to give up in the negotiations, he was fairly clear that Telstra is willing to consider many possible scenarios, as long as share value can be maintained. In his view, the negotiations will depend on how high the GOA is willing to go to compensate the company and protect shareholders, an aspect the company considers to be nonnegotiable. Whatever the scenario, Telstra seems to have concluded that constructive engagement with the government will, in the end, be more profitable for its Qgovernment will, in the end, be more profitable for its future. CLUNE