Why the Telstra share price rose on Wednesday

We examine the highlights behind the telco’s planned sale of its towers business.

Telcos around the world have spent the last few years divesting assets as a way to juice returns and simplify their business structures.

Telstra – Australia’s largest telecommunications provider – on Wednesday announced it had entered into an agreement with a consortium of investors to sell 49% of its InfraCo Towers business for $2.8 billion.

That consortium includes: the Future Fund, Commonwealth Superannuation Corporation, and Sunsuper

The $2.8 billion sale price implies an enterprise value of approximately $5.9 billion, meaning the sale was made at an EV/EBITDA(al) of about 28x. Leading into the sale, Macquarie analysts estimated the telcos infrastructure business would sell at a 25-30x multiple.

Fact check: for those unfamiliar, Telstra’s towers business represents the largest mobile tower infrastructure company in Australia, with 8,200 across the country.

From a practical perspective, it was noted that Telstra's majority stake would see it continued to own the 'active parts' of the business, as a means of maintaining the company's industry leading position in the mobile space.

Beyond that, the deal also involves a 15-year agreement between Telstra and the consortium of investors noted above, giving the telco ongoing access to these towers as well as any new towers that are built.

The sale is expected to be completed during the first quarter of fiscal 2022, ahead of the group’s prior expectations.

Telstra share price in focus

Investors responded favourably to the deal when it was announced, with Telstra finishing out Wednesday's session up 4.44% to $3.76 per share.

At those price levels YTD Telstra is up 24.92%.

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Use of the funds

Beyond all this, it was also noted that the intention was for Telstra to return a ‘large amount’ of the sales proceeds – approximately 50% of the $2.8 billion – to investors in the form of dividends in fiscal 2022.

The potential for Telstra to launch a share buy-back program was also noted, though no concrete details around the size or scope of such a program was revealed.

Telstra last paid an interim dividend of 8 cents per share -- made up of a 3 cent special interim dividend and a 5 cent interim dividend.

Looking ahead as well as providing further colour on the uses of the funds from the transaction, Telstra CEO, Andrew Penn said:

'We anticipate providing further details about the manner in which we will return those proceeds, including a potential share buy-back in FY22, at our full-year result in August.'

'THe remainder of the proceeds will be used for debt reduction to ensure we maintain balance sheet strength and flexibility. This level of debt reduction is important to deliver a broadly neutral credit outcome given the long-term Tower access obligations created by the transaction.'

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