Events are moving extraordinarily quickly in the NBN debate. Just 24 hours ago it seemed that the Federal government had Telstra over a barrel—one correspondent even remarked to me that Telstra was acting like a battered wife—however unfair that might be.

The government’s new legislation basically compels Telstra to structurally separate or face punitive action against its mobile and pay TV interests. According to one legal reading of the legislation provided to CommsDay, it potentially could force Telstra to divest such assets as its core IP network, its Endeavour Australia-US cable and even its mobile backhaul—unless granted a ministerial exemption. We are also told the legislation could remove legal privilege from Telstra’s internal communications regarding its competition regulation commitments.

In essence, the government had Telstra over the barrel. But events have turned quickly in the past 18 hours. To all intents and purposes, it appears that Telstra shareholders now will have the opportunity to coalesce for or against the government’s actions—and are choosing to actively organise against it.

The first sign of this was an interview that CEO David Thodey gave to News Corporation yesterday where he indicated that it would be the mass of 1.4 million shareholders—about 10,000 per federal electorate—who would directly vote on whether Telstra agreed to the government’s plans, as opposed to its board or management. According to today’s Adelaide Advertiser, Thodey said “I cannot make, and the board cannot make, these decisions ourselves. We will have to go back to shareholders to get their input based on what options are put on the table. If it’s a major change to the company, I have to go back to our 1.4 million shareholders.” This is significant: while Telstra management could propose a positive vote, the outcome of that vote could be subject to a range of external forces supporting rejection.

Thodey was playing conciliatory yesterday: “We work and live in Australia, we are Australians. So that’s critically important to us as well. If we were to do something that was not in the interests of the long-term position of Australia, that would be detrimental to our shareholders. We think it’s a great vision for the Government to put fibre to 90 per cent of homes – Telstra could never afford to do that.”

LITTLE? But those positive sentiments might amount to little as far as a vote is concerned.

Yesterday the former Telstra policy and communications chief Phil Burgess—apparently in Australia for a private visit to see old colleagues and friends—reportedly addressed a meeting of major Telstra shareholders in Sydney. According to the Australian, eight of Telstra’s largest shareholders—Investors Mutual, 452 Capital, BT, Lazard, Maple Brown Abbott, Orion, Tyndall and Cannae– held a meeting with Burgess to discuss the impact of the legislation. It is not clear how the meeting came about. This correspondent has been in regular contact with Burgess in recent days and it seems the meeting was a last minute, impromptu affair.

The newspaper report says “The highly unusual question and answer session was organised by Investors Mutual investment director Anton Tagliaferro, and reflects increasing unease in the investment community about the threat to Telstra’s earnings and future growth posed by the government decisions.”

“We have decided the legislation is draconian and very detrimental to Telstra shareholders,” Tagliaferro reportedly told The Australian after the meeting. “We will remind the board of its fiduciary responsibilities to shareholders to explain exactly what the legislation means or if they don’t choose to go down that path -- we may have to do it for them.”

Tagliaferro said the consensus of the meeting was that the Telstra board should do whatever it could to “strongly oppose what the government is doing” according to the report. “It’s fine for Telstra to co-operate with the government, but it should not be done at the expense of Telstra shareholders. Any agreement with government should not be to their detriment.”

This is an extraordinary turn of events. Telstra management wants shareholders to decide on its cooperation with the government, major shareholders are coalescing to vote no? It certainly throws a curveball into what seemed just 24 hours ago to be a major victory for the government in the offing.

The major obstacle with any acceptance by Telstra of vending assets into and, thus, gaining exposure to the NBN is the government’s constant rhetoric that it will resist cost-benefit analysis of the project.

For a start, if the government is to vend equity, sell bonds and gain Senate support for appropriations revenue for the NBN it needs to come up with a credible business plan that includes, at a minimum, a SWOT , benefits and risk analysis. The government’s seeming adamant attitude that this is not necessary is almost self-defeating—after all, at various junctures in the not-too-distant past various corporate entities such as Verizon, NTT, Reggiefiber of the Netherlands and HKBN in Hong Kong have managed to compile, present and persuade others of the merits of their FTTH rollouts via a rigorous business analysis. Why not here? The Federal government has arguably won over the broadband true believers with its vision. Now it needs to make a serious effort to show there is an economic basis to its plans for the less faithful and the sceptical. If it doesn’t, Telstra’s owners—10,000 per electorate—might reach their own verdict.

Grahame Lynch