Andy Penn’s timing couldn’t have been worse. When the slick-haired accountant accepted what should have been the crowning job of his stellar career – chief executive officer of Telstra – the phone giant’s share price was about to create a shareholder wasteland.
Now, three years and three months on, Penn faces a grim legacy: one of the greatest single destructions of investor wealth in Australia this decade.
Telstra shares have fallen from $6.735 on February 4, 2015 – 16 days before Penn’s appointment – to $2.86 on Friday. Some $46 billion has been wiped out – wealth that would have help fund many Australians’ retirements.
By comparison, the financial-sales scandal that cost AMP’s chairman Catherine Brenner her job hit investors $2.4 billion. That’s loose change compared with the damage wreaked on Telstra shareholders.
Does Penn deserve the blame? In a company the size and scope of Telstra it may be unfair to hold a single person responsible. Many other well-run telecommunications companies have suffered big share-price falls too.
Walking into quicksand
Some professional investors hold his predecessors and Telstra boards responsible. “It’s a little too easy to blame Andy for all Telstra’s woes,” says Peter Morgan, a former top fund manager at Perpetual and 452 Capital. “Andy has really been left as the last one standing at the mediocre (at best) Telstra leadership ball.”
But Penn can’t pretend he didn’t know he was walking into quicksand. Every underlying problem facing the company should have been clear when he agreed to succeed the celebrated David Thodey.
The loss of fixed-line connections to the national broadband network? Penn negotiated the deal to sell Telstra’s copper network to the government-owned NBN Co. when he was chief financial officer.
Less money from mobile phones? Penn’s first profit result as CEO reported that more generous data allowances and cheaper overseas calls meant customers were spending less.
“You don’t necessarily ever pick your timing,” Penn says in an interview. “Right now it is a very, very challenging market.”
Three weeks ago Telstra began selling unlimited data on mobile phones. The decision illustrated Penn’s horrible dilemma – to protect market share he’s being forced to condition customers to expect cheaper service.
No big surprises
The number of really big surprises sprung on Penn is zero. (For unexpected crises look at the four customers killed at one of Deborah Thomas’s Ardent Leisure theme parks or the thousands of clients exploited by Ian Narev’s financial “planners” at the Commonwealth Bank of Australia.)
Penn’s inability to propel Telstra over structural hurdles was demonstrated this week when Telstra downgraded its profit forecast – and pretended it hadn’t – because its already challenged mobile and internet businesses are doing even worse this year than expected. Last year the company said full-year operating profits could be as high as $10.6 billion. Now it says profits are likely to be closer to $10 billion.
Already-battered confidence in Telstra dived. The support stopping the stock tanking further – chunky dividends – is under threat too. Analysts fear Telstra won’t have enough cash next year to maintain the dividend at 22¢ a share.
So what is actually going wrong with this iconic company? Finally, it seems, one of Australia’s great monopolists is being broken. That’s great news for consumers. It is not so brilliant for shareholders.
For decades Telstra has insulated itself from competition through a relationship with most Australians, a huge marketing budget and aggressive political lobbying.
Today, Telstra faces two energised and well run-competitors, and an upstart newcomer, in its most lucrative market: mobile phones. What should be a growth market, broadband internet, is in decline (for Telstra) because a government-owned wholesale operator is driving competition.
For many years Vodafone Hutchinson was the sick man of the telecommunications industry. The business, which signed up 246,000 customers last year, is now off life support. SingTel Optus is winning market share from Telstra too.
But the bigger threat may be the enigmatic David Teoh. His TPG Telecom is building the first new mobile network in Australia in over two decades. Teoh is already putting downward pressure on prices.
A clash of rivals
In many ways the Malaysian-born Australian epitomises the clash between challenger and entrenched rival, autocracy and bureaucracy, and industry knowledge versus corporate power.
Penn, who lives in Melbourne, is a polished professional executive who worked his way up through the white-bread politics of the AXA insurance company. A high school drop-out, Penn now mixes with prime ministers, investment bankers and global CEOs.
Teoh, from Sydney, is a scrappy cost-cutter who cobbled together a bunch of internet service providers through a few audacious deals that put his own money on the line. Teoh is so low-profile he holds business meetings in a noisy coffee shop and refuses to allow newspapers to take his photograph.
TPG’s network is slated to be turned on later next year. At free for six months then, $9.99 a month afterwards, analysts don’t believe TPG is making money. That’s irrelevant for Telstra shareholders, who have the most to lose from more competition for mobile phones, which are enormously lucrative because they have become the centre of many people’s digital lives.
“I respect David Teoh,” Penn says. “I’m not scared of David Teoh.”
Desperate for new revenue
While Thodey was focused on improving customer service, Penn is desperate to find new sources of revenue. Last year Telstra began selling a product that connects different phones to the same line. One call can be answered on any device: landline, mobile or computer.
Called Liberate, the service taps into the hot-desking craze that has swept offices around the world. On paper, Liberate is a classic Telstra idea: a technologically advanced service that taps into a big shift in business behaviour. Telstra is trying to sell Liberate in innovative ways.
“They are not talking to traditional IT departments,” says Dustin Kehoe, who follows the company for specialist publication Current Analysis in Singapore. “You have to talk to people that have more influence like HR, in customer care, and in some cases building facility magaers.”
Penn doesn’t have enough Liberate-like ideas to outweigh declining businesses. Net profit fell 6 per cent last half to $1.7 billion. Revenue was flat.
Next month Penn will unveil detail about his plan to turn around the business. It will include cost cuts, new measures aimed at consumers and businesses, and more detail about the huge investments being poured into his networks.
Penn asks investors to trust him. Telstra will emerge from the downturn a stronger and more sophisticated company, he suggests.
“I am optimistic about the long-term opportunity in the industry,” he says. “I absolutely empathise with our shareholders. This affects them very directly. We just need to battle through this period.”
Throwing around cash
In the past, Telstra hasn’t helped by engaging in behaviour classic to big companies fearful of structural decline: throwing cash around.
Penn inherited one of Thodey’s pet projects: to place Telstra near the centre of the digitisation to healthcare. In Power Point presentations, the idea was fantastic. Telstra planned to use its expertise on government communications contracts to sell health software to medical departments, hospitals and related organisations.
The contracts were big and there was no dominant incumbent. Telstra thought it could walk in and talk over. It began a buying spree of health-IT startups. “We are trying to bring the digital revolution to health,” Telstra Health’s CEO Shane Solomon said in 2015.
Word spread around the small industry Telstra had opened its thick chequebook. Pretty quickly, Solomon had 1000 employees and a dozen or so businesses with different cultures that weren’t sure how to work together.
Financially, Telstra Health was a failure. A $240 million buying spree couldn’t even generate $240 million in revenue a year. Solomon resigned a year ago. Cynthia Whelan, Telstra’s head of New Businesses, which includes Telstra Health, left in December.
With Telstra shares below $3, some are buying. Investors Mutual, which has about $150 million of Telstra shares, topped up in the last week or two. The Sydney-based fund manager acknowledges that Telstra has been caught in an industry-wide downturn, but likes that Penn is willing to get out of businesses with poor prospects and take tough decisions about paring back costs.
“He’s doing a reasonable job,” says investment director Anton Tagliaferro. “Can he do more? Probably.”
with Max Mason
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