Telstra Capital Restructuring: Optimal Capital Structure and Strategies

This presentation discusses Telstra's capital restructuring, focusing on its optimal capital structure and strategies to improve it. It explores the forms of capital restructuring and the importance of liquidity and efficiency. The impact of debt and equity on Telstra's weighted average cost of capital (WACC) is analyzed, along with ways to reduce it. The presentation also covers how to increase cash, reduce working capital, and improve the cash conversion cycle. Telstra's dividend policy and the benefits of mergers are discussed as well.

Telstra
Corporation

Telstra
• Telstra: Largest Australian
based telecommunication
company.
• Founded in: 1975 (Telstra,
2018).
• Key Business: Fixed Line,
• CEO: Andy Penn
• Headquarters: Telstra
Corporate Centre,
Melbourne, Australia
• Revenue: A$29 billion
• Listed on: Australian Stock
Exchange
• New Zealand Stock Exchange
• Serving: Worldwide
• Purpose: To connect a brilliant
future
• EBITDA: $10.1 billion
• Employees and
Subsidiaries:35000, 150

Capital Restructuring
▸ Corporate Operation
▸ Accumulation of Debt and Equity
(Susman, 2017).
▸ Required when changes are
happening
▸ Affects the profitability of the
business
▸ Reasons to use: Dynamic market
conditions
○ Hostile take over bid
○ Bankruptcy

Why capital
Strcuture
To determine efficiency
Adds value to the firm
Risk taking capacity
How much capital is required (O'Keefe, 2017)
Ease in operating with the clients
Right blend is required to meet the competition

“
Forms of capital Restructuring
• Joint ventures
• Sell off or spin off
• Equity carve out
• Employee stock ownership
• Master limited partnerships
• Leveraged buyouts (Ross, Shakow, Graham & Gibson, 2017)
• Acquisition or merger
• Selling of the company

Telstra capital structure
Telstra's capital structure
2016 Weights 2017 Weights 2018 Weights
Debt 14647 48% 14808 50% 15316 50%
Equity 15907 52% 14560 50% 15014 50%
Total 30554 100% 29368 100% 30330 100%

Optimal Capital Structure
▸ Balance of Debt and Equity
▸ To optimize the earnings of the company
▸ Current debt to equity ratio : 1:1
▸ Debt shall no be more than 0.4
▸ High risk and Leverage by Telstra
▸ Investors are the key judge (Kumar &
Yerramilli, 2017).
▸ High debt low cash
▸ High equity, high risk

▸ Reduce the debt
component
▸ It shall be around
42%
▸ Less leverage and
risk
▸ Reduce the
current liabilities
▸ Think like a bank
How to improve the
optimal capitral
structure ?
▸ Develop new
strategies
(Costinot,
Donaldson, Vogel
& Werning, 2015)
▸ Compare with
industry averages
▸ Reduce the
interest cost
▸ Minimise the funds

Assets side of Telstra
▸ High cash :
$3550
▸ Semi Positive
situation
▸ Reduce the
cash in hand
▸ Too much
cash, red flag
to investors
▸ Telstra sold
inventories
▸ Increase in
billing
processes
▸ Funds from
commercial
works (Telstra,
2018).
▸ Sound cash is
necessity
▸ Derivative
financial
assets
increased
▸ Offshore
market
movements
▸ Regular
supervision is
required

Reduction in
working
capital
 Measurement of the liquidity and efficiency
 More capital, stagnant pillar
 Improves earnings and market share
 Current Assets – Current liabilities = ($7077-
$8816)
 -1739
How to improve ?
 Issue of stocks
 Replacement of short term liabilities
 Sell of long term liabilities (Wasiuzzaman, 2015)

Reduction in receivables
▸ Receivables days : 63 days
▸ High time period for Telstra
▸ Lowers down the efficiency and activity
▸ Occurrence of bad debts
▸ High leverage can turn into liquidation
How to improve?
▸ Short term credit lines (Jones, 2018).
▸ Clearing out bills in cash

WACC
 Rate investors
receive
(Krüger,
Landier &
Thesmar,
2015).
 Telstra’s WACC:
6.7%
 ROIC: -2%
 Cost of
Capital :
unmatched
 Destruction in
value due to

How to reduce WACC through Debt
WACC Telstra Cost of Equity
Risk free rate of Return 2%
Market value of
Equity
27032 Beta 1.14
Market Value of
Debt
20140 Expected return on Market 6%
Expected Return 6.52%
Total 39922 Telstra Cost of Debt
Cost of Equity 6.52% Interest Expense 473
Cost of Debt 3.67% Book Value 12890
Corporate Tax 0.3 Cost of Debt 3.67%
WACC 4.83%
WACC Telstra Cost of
Equity
Risk free rate of
Return
2%
Market value of
Equity
27032 Beta 1.14
Market Value of
Debt
12890 Expected return on
Market
6%
Expected Return 6.52%
Total 39922 Telstra Cost of Debt
Cost of Equity 6.52% Interest Expense 473
Cost of Debt 3.67% Book Value 12890
Corporate Tax 0.3 Cost of Debt 3.67%
WACC 5.25%
ACTUAL WACC PROPOSED WACC

How to reduce the cost of
capital
Study
external
factors
Reduce
the
Environm
ental
Costs
Shareho
lders
myst be
less
affected
Lower
down
the
targets

Cash conversion
cycle
Days
Inventory
Outstandin
g
Days
Payable
Outstandin
g
Days Sale
Outstandin
g
Days Inventory Outstanding Amount
Inventory* 365 292365 33.38262
COGS 8758
Days Sales outstanding
Accounts Receivable
* 365 1831570 63.06625
Revenue 29042
Days Payable outstanding
Accounts Payable * 365 1764775 60.7663
Revenue 29042
Cash
conversion
cycle
35.68
257

Why increase in
cashSell of
obsolete
assets
Eg: Old plant
and
machinery
Liquidate the
old inventory
Eg: sell the
current stock

Steps to increase cash
Expansion of sales
market
Eg: new product or
service (Bates,
Chang & Chi,
J2018).
Revaluation of expenses
Eg: cut out unnecessary
expenses (Page, 2015).
Focus on long term
liabilities
Eg: loans and
advances
Improve the
working capital
Eg: reduce the
payables

Dividends
Fully franked dividend: 11 cents Per share
Announcement of policy: August 2017
Total dividend: 22 Cents per share (Telstra, 2018).
Fully franked dividend: 70%-90%
Return to shareholders: 75%

SELL, MERGE OR
ACQUISITION? The best plan
Merger with TPG Vodafone
Deal of $15 billion
Prices spiked by 1.25%
Selling is unnecessary (Duke, 2018).
Acquisition requires enough capital to
distribute

Benefits of Merger
▸ The company is alarmed to
perform better
▸ The earnings and the share
price increased
▸ Price of shares spiked by 1.25%.
▸ Increased capacity, speed and
the ability to connect many
more devices at once.

Conclusion
Focus on Liquidity and Efficiency
Refinance the capital structure
Imporve the earnings and working
capital

References
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