July 2017

Australian telecommunications provider Telstra transferred its American Depositary Receipts programme to Deutsche Bank in October 2016, after 19 years with the previous bank. Janet Du Chenne talks to Investor Relations Manager Colette Campbell about how she managed investor communications during a time of significant change

It’s been a decade since two major announcements fundamentally changed the Australian telecommunications sector and the future of telco giant Telstra.

One was the launch of the iPhone, which revolutionised how people communicate with each other, how they access information and services, and how they are entertained. For Telstra, this meant adapting its business model to deliver the best experience to customers using the new technology. In light of the iPhone’s arrival, Telstra’s strategy was to differentiate its products through its networks – its speed, its coverage and reliability, explains Colette Campbell, Investor Relations Manager, who looks after North American investors in the company.

The second announcement that changed Telstra’s future and continues to have a significant impact was the Australian government’s announcement that it would build a National Broadband Network, or nbn. Telstra’s copper network has enabled fixed (voice and broadband) services to both retail and wholesale customers who have in turn paid Telstra for these services. Telstra also supplies broadband services over its Hybrid Fiber Cable network, or HFC, which also carries Foxtel Pay TV services. Revenue and EBITDA from Telstra’s fixed services accounted for 27% and 32% in the 2016 financial year respectively.

Changing track

The nbn, a separate wholly-owned government entity, is deploying a mixture of technologies to roll out a new high speed broadband network across Australia which will result in Telstra’s copper and HFC networks being progressively decommissioned or transferred to the nbn. This means Telstra simply becomes a reseller rather than a wholesale and retail provider of services. “This change is expected to have a slowing effect on the growth of our sustainable earnings and will dilute the margins of Telstra’s fixed business, because the margins as the owner of the network are much higher than those we achieve as a reseller,” explains Campbell.

Clear communication and engagement of Telstra’s investors have been required on how the firm is tackling these changes, with a strategy geared towards increasing productivity and reducing costs, additional investments into the business as well as improving the performance of its other core products. This has placed Campbell and her colleagues in the Investor Relations team at the centre stage. “Transparent communications to investors on the progress of the nbn transition and making sure our investors understand the short-term and long-term impacts of these changes is important,” she says. “This 10-year work in progress was affected by a change in government policy in 2013, but it is now well under way in Australia and over 20% of homes are now connected to the nbn.” Telstra will be compensated for the loss of wholesale access revenue and will receive a number of one-off payments from nbn as customers transition from the copper network, adds Campbell.

Despite the changes, Telstra ultimately remains focused on providing a service through its networks, and through its products and services. Given that many of the company’s 1.4 million shareholders are also customers, the Investor Relations team is also conscious that communicating with a broader investor audience means communicating with the customer audience at the same time. Around 30% of the register is held by domestic institutions and around 20% is held by international institutions, including the American Depositary Reciept (ADR) programme, which provides access for US investors and helps further diversify the share register. Invariably, Australian companies look for the marginal buyer, which is typically the offshore institutional investor. The ADR fits in nicely with tapping the US institutional and retail investor bases, since Telstra is no longer listed on the NYSE. With the US being the largest pool for capital in the world, having an ADR adds that extra diversity and optionality for Australian corporates.

Crossing the border

In order to engage these shareholders on its strategic change, Telstra also looked to understand them better, particularly the foreign investors. This meant a new approach towards ADR investors. “Part of our mandate in Investor Relations is to ensure that we have shareholders of different geographies, with different motivations to buy and sell our shares and different motivations to hold them, so the ADR is very much a part of that diversification strategy,” says Campbell. “But our historic approach to our ADR programme had been quiet passive. What that means is that we hadn’t actively looked at the ADR holders in our register, we hadn’t analysed the motivation behind them buying or selling. We hadn’t understood the retail component of who is trading an ADR. In general, the programme did not receive a lot of attention over the time that it was sitting in Investor Relations. Also we hadn’t differentiated our ADR holders from our international investor engagement strategy – it had all been part of the one package.”

When Campbell joined the Investor Relations team two years ago, the time was right to reconsider the ADR programme. “Speaking to Deutsche Bank helped us throughout the process and to get a better understanding of what was motivating the ADR investor base. In reviewing our depositary bank it was important for us not just to get a service provider. What we really wanted was a partner – we wanted someone that would help us with our investor targeting strategy for North America broadly and also to identify the opportunity within the ADR investors sitting underneath that umbrella. In addition to the partnership, there are things that Deutsche Bank helps us with in terms of our shareholder targeting. This includes the DBVIC conference, which helps us to engage directly with our ADR holders. We were looking for a number of different providers for the service but Deutsche Bank really stood out with the value add that we get from the relationships, the insight and the knowledge that they have through their ADR service.”

A deeper understanding

The transfer of the programme to Deutsche Bank required a deep understanding of the complexities of the Telstra Act, which sets out foreign ownership restrictions that were set by the government in 1991 before Telstra became a public company. This includes the 5% limit that a foreign investor can hold in the company as an individual and an aggregate restriction of how much of Telstra’s shares can be held by foreign investors.

Campbell explains, “As we were going through the ADR agreement it was helpful for Deutsche Bank to understand our requirements under the Telstra Act and to make sure we knew who would be responsible for monitoring our obligations under the Act, and also what the actions and accountabilities would be if we were approaching the limits under the foreign ownership restrictions.”

Forward-looking strategy

Campbell continues, “Considering that our ADR programme has foreign investors and investors in the Australian listed shares, we have to make sure that when we aggregate those investments they still fall within the Telstra Act restrictions.” Making sure Telstra and Deutsche Bank were compliant with the specified regulations meant many days and nights of discussion between lawyers and transactions teams to ensure they were all on the same page.

In taking steps to focus on its core strengths, Telstra has made other strategic decisions in the last year and a half. This includes walking away from a deal to partner with a company in the Philippines to build a wireless network because it was unable to reach commercial agreements that would achieve the right risk-reward balance. It also sold a significant investment in a company called Autohome, which is an e-commerce business for motor vehicles based in China. Today Telstra is more focused on its core business rather than looking at adjacencies or areas where it is not an expert. “We are not looking at those areas any more – we’re much more focused on things we are good at and around maximising the value from our core business and growing businesses that are close to our core,” says Campbell. “It’s all about not surprising the market in what we do. We’re sticking to our strategy and the investments we are making are very consistent to what we’re talking to the market about.” That forward-looking strategy sees Telstra reviewing its capital allocation strategy and what that means for shareholders. “As part of that review, we’re reviewing our dividend policy, our M&A criteria and our other investments and long-term capital requirements,” explains Campbell.

She concludes, “We’ve been engaging our shareholders to understand what their priorities are. The review is ongoing but once the decision has been made and announced to the market then our team will go out and engage with our shareholders on what that strategy is.”

The Deutsche Bank view

It is a great honour for Deutsche Bank to have been appointed as depositary bank for Telstra’s American Depositary Receipt (ADR) programme. We are committed to aligning our service offering with Telstra’s desire to grow their North American investor base through this.

We are helping Telstra target investors more efficiently through our virtual investor conference service, enabling the client to engage directly with current ADR holders and potential investors. Telstra has acknowledged the value-add and expertise we offer clients through our product offering.   

Jose Sicilia is Global Head of Trust & Agency Services at Deutsche Bank

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