Telstra stock rebounds, analysts upbeat | Ipswich Business | Business News for Ipswich, Australia

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Telstra shares have rebounded from losses driven by fears its likely structural separation will hurt earnings.

Analysts are now predicting changes to the business could actually improve shareholder value.

About $2 billion was wiped off the telco's market value on Tuesday after the federal government announced reforms to industry legislation to promote competition, remove red tape and alter the structure of the market by giving Telstra "flexibility" to determine its future.

The plan involves the structural separation of Telstra's wholesale and retail businesses - by either voluntary or forcible means - to create a more level playing field ahead of the build-out of a $43 billion high speed national broadband network (NBN) by bid winner NBN Co Ltd.

But Telstra shares were up 13 cents, or 4.18 per cent, to $3.24 at 1421 AEST on Wednesday, after losing 4.31 per cent or 14 cents by the end of trading on Tuesday, as shareholders were urged to take a 'wait and see' approach.

"After delving into the detail we are much more comfortable and believe the stock price reaction to the news has been overdone," Merrill Lynch analysts said in a client note on Wednesday.

The Competitive Carriers' Coalition (CCC) said the functional separation of British Telecom in the UK proved shareholder value would not automatically be lost if Telstra was divided.

"Much of the reaction to the government's announcement yesterday is, frankly, bemusing," CCC executive director David Forman said.

"Those claiming to be shocked at the announcement clearly have not followed the debate."

Proposals to split Telstra's businesses were flagged by the government when it unveiled its NBN plans five months ago, and the industry has called for separation for years.

Many analysts on Wednesday left their valuations of Telstra shares unchanged, with at least three currently rating the stock as a buy.

"In our view (the) announcement could mark the last of the adverse regulatory news flow for Telstra," Goldman Sachs JBWere analyst Christian Guerra said in a client note.

"While full resolution is unlikely until the end of the year, we are nearing greater certainty."

Broker UBS maintained its 12 month share price target of $4.55 on Telstra. It last traded around that level in August 2008.

However, investors still have reason to be concerned after credit ratings agency Moody's placed Telstra under review for a possible downgrade.

"Telstra's highly integrated business model has provided it with strong earnings and robust margins, providing significant support to its A2/P-1 ratings," Moody's lead analyst Ian Lewis said.

"However, we consider that the proposed legislation - should it be enacted - creates significant uncertainty over the company's ability to sustain equivalent margins under sharply increased regulation, particularly a full structural separation."

But analysts say there are a number of avenues available to Telstra under the government's planned reforms that could prove less destructive than previously thought.

The consensus is that co-operation with the government over the next few months of negotiations could see a relatively favourable outcome.

Under the reforms announced on Tuesday, Telstra has effectively been given an ultimatum to voluntarily undergoing a structural separation, or face a forced functional separation.

Included is a threat to prevent Telstra from expanding its wireless broadband spectrum if it does not voluntarily separate and maintains its copper network and 50 per cent stake in pay television outfit Foxtel.

Analysts believe Telstra will take the voluntary option, given that its exclusion from future wireless spectrum auctions would be untenable given the massive growth prospects for wireless technologies.

However, the legislation includes an option for Telstra to pursue a gradual separation, rather than a definitive split in two.

This could see Telstra progressively migrating its fixed-line customers onto the (NBN) as it gets rolled out, then selling or agreeing to no longer use its current fixed-line network.

"This is exactly in line with our base case assumptions for Telstra - we already assume that as the NBN is built out Telstra's copper network is progressively shut down and traffic is transferred onto the NBN," UBS analysts said.

Mr Guerra said other alternatives include Telstra selling its network assets to NBN Co Ltd, a move that would reduce the cost of the NBN and accelerate its completion.

From there Telstra could either sell its copper wire connections to households to the NBN Co, or just the ducts, pits and pipes and hold onto the copper asset.

Given Communications Minister Stephen Conroy's comment that the copper network "is literally collapsing in the ground", the second option is most likely, Mr Guerra said.