What's new?

The Rudd Government's proposed legislation to dismember Telstra is a key part of its haphazard strategy to build its National Broadband Network.

Telstra's main shareholder, the Future Fund, has voiced its concern about the significant risks to Telstra from the Government's plan to break up the perceived monopoly. Now the Opposition and the independent senators are considering blocking or delaying the legislation until the company can receive fair treatment.

In the meantime, KPMG and McKinsey are busy working out the nuts and bolts of how the broadband network should be financed, built and operated. Their study probably won't be available until next year.

That means Telstra's board is stuck between a rock and a hard place. It is being railroaded into recommending a structural separation of the company's fixed-line assets (including the thousands of employees and their benefits, plus the physical assets) that will undoubtedly destroy a fairly large chunk of shareholder value. There is no guarantee a fair price will be received for the assets when transferred to the newly formed NBN company. Fiduciary responsibilities ensure the board cannot make such a value-destroying recommendation — a fact of which Communications Minister Senator Stephen Conroy should be well aware. Hence the company's desperate plea for more negotiation time.

If the board does not heed the minister's "request", the Government will inflict a functional separation of Telstra (thereby avoiding legal potholes). Just to make sure Telstra understands the threat, the minister would also have "discretion" to force Telstra to sell off its hybrid fibre coaxial cable and its 50 per cent stake in Foxtel. In addition, the minister would throttle any future broadband expansion by denying the company the opportunity to bid for the extra spectrum needed for it to grow its wireless broadband business.

In the finest tradition of Mick Dundee, Senator Conroy has shown Telstra what a real knife looks like.

The outlook

Pity poor David Thodey. Casual observers might think he has been handed a suicide mission as the company's new chief executive. His predecessor's biggest legacy might not be the impressive new mobile and IP platforms built in the past five years. Instead, the Government's hostility towards Telstra has stemmed from the abrasive and at times arrogant stance taken on regulatory and legislative issues by Sol Trujillo and Phil Burgess.

Regrettably, Telstra is up the creek without a paddle.

Price

Understandably, Telstra's share price has massively underperformed the top 20 company index by 37 per cent so far this year. The leaders index has risen almost 32 per cent while Telstra's price has gone backwards by 17 per cent since the start of the year.

Telstra's market capitalisation has dropped by more than $8.2 billion this year. By comparison, Commonwealth Bank's market value is up by nearly $39 billion, BHP by $30 billion and Westpac $27 billion.

Worth buying?

Contrarians say to buy quality stocks when they are out of favour. Realists say that when in a hole, stop digging. Until the outcome of the legislation is known, the surrounding uncertainty will continue to hamper Telstra's share price. Even then, the prognosis might look a bit scary.

Greg Fraser is a senior industrial analyst at Fat Prophets Sharemarket Research.