May 30, 2025 • 37 mins
This week, James and Anthony reveal what the new strategy of one Australia’s biggest companies tells us about the coming AI boom, take you inside the biggest corporate collapse since the pandemic and explain the new theory moving the market - the TACO theory.
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Episode Transcript
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Speaker 1 (00:04):
The Australian Financial Review. Hello, I'm James Thompson, senior chanticleer
columnist at the AFI. Welcome to our weekly news breakdown
of all things business, finance and markets with me to
day as always as my chanticleer colleague. He's worth more
(00:25):
than all the shares in Australia's second biggest hospital company
put together. It's Anthony McDonald. How are you, Anthony?
Speaker 2 (00:31):
Yeah, Fortunately no one and a half billion dollar loan
to here.
Speaker 1 (00:33):
Jameson absolutely well. This week we reveal what the new
strategy of one of Australia's biggest companies tells us about
the coming AI boom. We take you inside the biggest
corporate collapse since the pandemic, and we explain the new
theory moving the market, the Taco theory. But Anthony, let's
(00:54):
start with the government decision that's going to shape the
country for I don't know forty years. The approval to
extend the Northwest Shelf liquefied natural Gas project, which is
operated by Woodside up there in Western Australia. Now, Anthony,
the Environment Minister Murray Waite, he was pretty open that
this was going to make people unhappy. Whatever his decision,
was Did he get it right though.
Speaker 3 (01:15):
Well, there's definitely a spicy meat ball of a decision,
and yeah, I think it's right. But I mean it's
so controversial because it's gas, fossil fuels, climate change's big business.
I mean, you're never going to make everyone happy. I mean,
in a perfect world, the whole world would have already
transitioned from gas and off all fossil fields. We wouldn't
even be having this conversation, and would beyond the renewable energy,
the extension of the Northwest Shelf would be a no brainer,
(01:37):
wouldn't even be needed.
Speaker 2 (01:38):
But James, we're just not there.
Speaker 3 (01:40):
So we've come around to or realize we're not in
this perfect world and the energy transition is not going
to be a perfect thing. And the world needs gas.
Australia has gas. Australia needs gas and we need it
so badly that we're building an import terminal just south
of Sydney here, James, which is quite unbelievable really, And
there's another one in planning for Downagel Long. But I
(02:00):
think this decision, James, was a pragmatic one. You know,
the Labor government, they really changed their message on gas
in the past year or so. It is the transition
feel for the next few decades. And if you're okay
using it here in Australia, James, you've got to be
okay extracting it, don't. I think that's what this comes
down to. And it's something we do well at Northwest Shelf.
It's been operating for decades. This an extension of it.
(02:22):
It's a very very big extension. It's our third biggest export.
It's good for the country in terms of the country's
balance sheet. So yes, the right decision.
Speaker 2 (02:30):
What do you think?
Speaker 1 (02:31):
Yeah, Look, I think we've been talking for a while
on the podcast about how inflation changes everything. It's changed
the outcome of all these elections. Most of the incumbents
got kicked out because of high inflation, Anthony Alben Easy
being the notable exception. But the inflation story has changed
the government's few on gas. In the last couple of years,
it's become clear that because of inflation in the general populace,
(02:55):
the cost of living going up, and because of particularly
inflation and construction costs, the energy transition is not going
in the way we want it to or ultimately need
it too. It's just going to be slower and tougher
and more expensive than we thought. And when you've got
affordability problem, you know you need a transition fuel, as
(03:16):
you say, to try and get us from one point
to the other. Gas has something we've got lots of
and you can see in the last twelve months the
government's really changed their tune on gas. And Meg O'Neil,
the CEO of Woodside, she said exactly that the conversation
has changed in the last couple of years as people
are looking at their power bills and going, hang on,
why is this going up so far? Don't we have
(03:37):
lots of energy here in Australia. So I think you're
right pragmatic decision. Does the Northwest Shelf go for another
forty years out to twenty seventy Well hopefully not, I guess,
but you know that this gives Woodside the certainty it
needs to invest certainly over the next couple of decades.
So it's the one thing Anthony has taken six and
a half years to get this approval in place. That
(04:00):
can't be right, That can't be good for any business
in Australia. That is something that we need to learn
out of this episode. We've got to move faster on
this stuff.
Speaker 3 (04:08):
Yeah, just quickly, James, for the Chuck hard Cares out there.
Can you think of a busier company in Australia in
the past five years? The mood Side, you know, it
bought BHP's petroleum business in a really rare script deal
I was worth tens of billions of dollars, tried to
buy Santos, sold a half share in its plutou up
there in the Northwest.
Speaker 2 (04:26):
As well.
Speaker 3 (04:26):
When Global LNG last year, when it brought into a
US project called Driftwood, it now wants to develop that
that's going to cost tens of billions of dollars. Yeah,
it bought a clean ammonia project in the US that's
another two and a half billion dollars US last year,
and now it has this Northwest shelf extension and James
I saw cities analysts saying that could be a twenty
five billion dollar development. It's huge, huge maneuvering from a
(04:48):
company that's supposed to be in a sunset industry, whose
shareholders voted against this climate plan last year, who's some
of whose sharhold has tried to kick the chairman, Richard
Goiter out last year.
Speaker 2 (04:58):
There's so much going on there.
Speaker 1 (05:00):
True, but I think that's the nature of the beast.
You know that this energy transition is happening, it needs
to happen. It's it's all over the shop, and so
Woodside is going to be here, there and everywhere. I
think that's what you'll that's what will continue to see
that they're going to be need to be very nimble
as this as this plays out.
Speaker 3 (05:16):
Okay, James has been killing me since the start of
this episode. What the hell is the tarco theory?
Speaker 1 (05:21):
The tarco theory? Anthony was introduced to me by Anthony Scaramucci,
the Mooch, who was famously Donald Trump's press secretary for
I think nine days in the first Trump administration. I
spoke to him a couple of weeks ago and he said,
everyone over here is talking about the taco theory. Trump
always chickens out. And since since the Mooch told me
(05:45):
about this a couple of weeks ago and I put
it in there, He's right, it's everywhere. Because Trump suddenly
backed out of these tariff threats against China and against
the EU, and investors just expect that he's going to
back out on all these tariff and trade policies now.
Interestingly enough, Anthony on Wednesday night, it's a very brave
(06:07):
reporter in the Oval Office said Trump, excuse me, mister President,
have you heard of the taco theory?
Speaker 2 (06:13):
Really?
Speaker 1 (06:13):
And he said, that's a nasty question. He said, it
might look like chickening out to you, but it's just
good negotiating. Well, I'm sorry, Donald, but the market doesn't
believe you, mate. They have just decided that you are
going to keep backing out of these big threats that
you've made. Doge is dead. The restrictions on government spending
(06:33):
they're gone, the tariffs they look like they're gone. And
so here we are, the markets surging, We're back above
the levels we were at Liberation Day. The Wall Street's
only off three percent from its all time highs. No,
it's party time out there, Anthony. Does it feel quite
right to you that it's party time?
Speaker 3 (06:53):
Not really, But I do like your taco theory. Trump
always chickens out. Tariffs are coming off, keep the taco
is going. It's highly ententitating, isn't it.
Speaker 1 (07:05):
Yeah, it's like a Goose Marti Gomez restaurant in here
at the moment. Isn't it Alright, Anthony, let's get to
our first big topic. And on Tuesday we've got a
glimpse into the future when the telecommunications giant Telstra took
the wraps off its new five year strategy. Now, Telstra,
as we all know is it's a true giant of
Australian business. There really wouldn't be too many of us
(07:26):
who don't use its network or its digital infrastructure in
one way, shape or another. And as we all become
more connected, demand for that network and that infrastructure is
only going in one direction. The amount of data going
across the network in the past five years has tripled.
And if you think of all the stuff you do
on your phone, you can understand that. But Anthony, Telstra's
(07:48):
got a problem, doesn't It Demands through the roof, investments
through the roof, but Telstra is barely getting a return
above its cost of capital. Anthony, tell us a little
bit about what the cost of capital means and why
have Telstra's returns been so poor?
Speaker 2 (08:04):
Well, James has been like this for years.
Speaker 3 (08:05):
Like Telstra started out with a role gold network owned
by the government, subsidized by the government, regulated, lots of
political pressure to keep it roll gold service all parts
of Australia, you know, the remote and rural stuff. It's
a cost center, not a profit center for Telstra, and
still is. I mean Telstra's problem is that it's had
to keep investing in this network. You know, three G,
(08:26):
four G, five G, all that Capex James. It means
it's got a premium network, the biggest invest in Australia,
and if allays fair in love and war, it should
be able to charge premium prices and you know, really
really premium prices. But you know, the two b competitors
opt in Vodaphone. While they're small competitive Telstra, they do
keep it honest totally. They keep things pretty competitive in
(08:46):
the sector. I mean their network works fine for most
Australians for most jobs. They do their best to keep
the prices low, keep the pressure on Telstra. So Telstra
is this big, big gorilla, but the other two have
got networks that are competitive at least and that sort
of keeps a bit of a cap on Telstra's prices.
So this constant reinvestment from Telstra, combined with the pricing pressure,
(09:10):
combined with the regulatory and political pressure which is still
there a couple of decades on from the privatization means
it Telstra hasn't been able to really get the returns
it should have on these really valuable assets. Now, the
cost of capital is how much it costs Telstra to
borrow how much it should cost capital to spend shareholders money,
like what the return is that shareolders they expect, and
(09:31):
the returns that shareholders makes the profit It just isn't
enough to cover those numbers. Now, in the past, if
you bought Telstra shares, you weren't really buying it for
its profits, right, You're buying it for its dividend, right,
and you expected it to make normally twenty eight cents
a year in dividends it would pay out. You didn't
worry so much about the capital growth which would come
from the earning scrace and everything, and you just milk
the dividends for what they're worth own it for that. Now,
(09:54):
if you've owned Telstra shares and lots of strains did,
and I think more than one millions still do, it's
been a pretty sluggish ride, which is ironic, James, isn't
it Because the company at its heart it's about technology.
Speaker 2 (10:07):
Yeah, it's technology.
Speaker 3 (10:08):
Infrastructure, and what's been a better place to invest in
the past decade than technology and tech infrastructure. So it's
been a big problem for Telstra James. That leads to
the obvious question, what's the CEO, VICKI Brady. What's she
going to do about it?
Speaker 1 (10:22):
Well, look, the first thing she's going to try and
do is, over the next five years, get Telstra's return
on invested capital from about eight percent at the moment,
which is barely washing its face, up to about ten percent,
and that would be absolutely industry leading in the telco
sector around the world. How is she going to do it? Well, Anthony,
I'm sorry to say, she's going to make you pay.
(10:43):
You're going to make us all pay. Look, I mean,
at the heart of this is exactly what you said.
Telshra's got a premium network. All Telstra's customers tell it
all day and all night that it's got a premium network.
It dominates the mobile business. Particularly. What Brady needs to
do is extra track the right amount of return for that.
So what we'll start to see over the next five
(11:04):
years is Telstra sort of offering attributes of that network
that people can buy if they need an extra premium service.
I'll give you a couple of examples. Let's say you're
a you know, you love streaming movies on the go,
so you need a really good, really high quality, reliable
(11:24):
service for that. Well, telstrall make you pay a little
bit extra for that extra reliability. You're a food vendor
right at a big music festival. The one thing it
can't go down is your payment system, so you might
pay a little bit extra for a guaranteed spot on
the network to make that work. You're a business that
does artificial intelligence stuff. You need really low latency. You
(11:47):
want the bits and the bytes going down the pipes
really quickly, so you know you'll pay a bit of
extra for that. The idea, Brady says, is to sort
of have a good, better, best service and charge people appropriately.
Now that is done, and in every sector you can
think of, there's a tiered pricing model. It hasn't been
(12:07):
done in telcos. They haven't been good at it. Basically
they've built the network and said, look how good this
thing is. You know, we might change your data inclusions
or your data speeds a little bit, but that's that's
that's all. So this is a bit of a step
change for Telstra, and as more and more data goes
down these pipes, as more and more of us become
reliant on the network, it wants to get a return
(12:28):
for that, and its shareholders do too.
Speaker 2 (12:31):
You know what Teestra could do, James, what's that?
Speaker 3 (12:33):
For the ones that are into streaming and for the movies,
they could make the first movie free and it could
be Jerry maguire And you can sit there listen to
someone saying, show me the money, Show me the money, and.
Speaker 2 (12:42):
Then everyone can understand what Telstra's on about.
Speaker 1 (12:44):
I think they'll have a much more subtle slogan than that.
Speaker 3 (12:47):
Yes, but James, you promised us AI. Where does this
new revolution come into for Telstra?
Speaker 1 (12:53):
Well, look, I mean obviously it comes in through the
demand they expect to see across its network that's going
to be AI driven. But the message I got was
that what Brady's saying is that AI is not some
sort of experimental thing now is here. It's using AI
to do all sorts of things on its network. So
make sure that you know recognize patterns such that it
(13:16):
if its network goes down, it can quickly do maintenance.
It can do preventative maintenance. I mean one of the
interesting things. One of the big costs for Telstra is
power and petrol. So yes, you know you need a
lot of you need a lot of energy to keep
the network going. But every time there's an outage somewhere
on its infrastructure, someone gets in a truck and rolls
(13:38):
out there and goes and fixes it. So if you
can have AI monitoring and self healing they called it
the network, then you can save a lot of money
doing that. The other place you can save money is
if you can deploy AI into your workforce. Now we're
already seeing a little bit of that. When you ring
up Telstra and you get on the ring up the
(13:59):
coll center and got an issue, you know, it's a
pain in that pain bum No one likes that. Back
in the day, they used to have used to have
to manually enter the notes from that conversation. Now AI
does that for them automatically. Only saves the call center
person thirty or sixty seconds per episode, But when you're
doing millions of these a year, that starts to add up.
(14:20):
Brady was actually quite honest. She said, Look, in five years,
the Telstra workforce will be smaller than it is now.
Now We don't know how much smaller? Is it ten percent?
Is at five percent? Is it forty five percent? I
don't know when Vicky Brady doesn't know, which is fair
enough because the tech is developing very quickly here. But
we've got a big AI summit coming up next week, Anthony,
(14:43):
And to me, this is more proof that this stuff's
becoming very real, very quickly, isn't it. I mean, you
talked to one of our big data center leaders, Greg Goodman,
this week. Where does he think we are in this
sort of whole AI revolution.
Speaker 3 (14:59):
Ye, our data center leaders Greg Goodman. Now, James, that's
a sentence you wouldn't have said like a year ago,
let alone two years ago. It's amazing how much this
this space, to use Goodman Group's word, is changing. You know,
like this is a logistics company that develops warehouses, logistics parks,
that sort of stuff. Now it's really leap left into
data centers. And he says, it's hot, hot hot, you know,
(15:22):
red hot.
Speaker 2 (15:22):
You know what, while while we.
Speaker 3 (15:24):
Might think that the data centers stories come off the
boiler bit, he says, like on the ground, it's still
red hot.
Speaker 2 (15:30):
It's as hot as ever.
Speaker 3 (15:31):
And why it's just it's just the simple message we've
been hearing for a while now, James. It's that generative AI,
which is the AI that can create new content like text, images, music,
and video. And the data demand is going through the
roof the big software companies Amazon, Microsoft, Google, Meta, et cetera.
They're investing huge sums into AI, tens of billions of
(15:52):
dollars a quarter some of them, and they need data
centers to make that growth come true. Yeah, So, like
I said, he's gone from logistics parks to jump over
into data centers and he reckons He's going to have
five hundred megawat's worth a data center started by June
next year.
Speaker 2 (16:07):
Five hundred megawats is a lot.
Speaker 3 (16:08):
He's got one in Sydney at Artaman, just up the
road from North Sydney here.
Speaker 2 (16:11):
James got one down there for you in Melbourne. Take
out of Paris. Back of the envelope.
Speaker 3 (16:16):
Five hundred megawats is about five billion dollars worth of development, right,
so Goodman Group will find some of that itself. It'll
also bring in some capital partners. The names that it
brings in James's capital partners and the price at which
they come in or the return expectations at which they
come in in a I mean, that's the bit that
really shows you how hot this sector is.
Speaker 2 (16:35):
We don't really have that data yet, but.
Speaker 3 (16:39):
If Greg Goodman's to be believed, there's plenty of capital there.
It's just a matter of getting the timing right. But
for him, he says, for Goodman Group, they've got all
these developments. They've been working away at them in the
background for a bit, he said, You've got but they're
trying to do that prep work as fast as they can,
you know, securing the power, securing the approvals, getting all
(16:59):
the equipment. He said, there's not many holidays at Goodman
Group at the moment because there's this big opportunity there
and they're all rushing to get it out. Basically saying, look,
don't forget about the data centers theme. It is definitely
not dead. Yeah, fair enough, now, James, speaking of AI,
we had inn videos result this week. Can you tell
us about it quickly?
Speaker 1 (17:18):
Oh? Well, you and your generative AI Anthony, that's so
old hat. That's last week, mate. I'm onto agentic AI now,
which sounds even cooler, doesn't it. This is all about
AI agents now, AI agents they're the ones that they
can basically think for themselves. This is where you get
an AI agent that can reason, work through a problem,
(17:39):
and then take action. So you know, you might have
an AI agent that does summarizes the call center transcripts
or does some other role in videos. Ideas that we're
going to have a sort of virtual workforce of these
that you can just sort of pull off the shelf
and say, yep, take that one, Take that one, take
that one, And that's where we're moving now. To be fair,
(18:01):
that's where AO needs to move because the money is
not in mum and Dad sitting at home doing chap
GPT searchers on their next holiday. There's no cash in that.
The cash is going to come from businesses replacing human
workers with virtual workers. It's that simple. Well, it is
that simple, and it's that scary, and it's that exciting.
That's where Invidio says we are now and that's the
(18:24):
next part of this revolution. So watch out. I think
we're going to have a lot of fun at the
AI Summit next week chewing through some of what that
means for austrained society, because I'm going to have some implications.
Speaker 2 (18:36):
Oh yeah, there's a lot going on for our second
to be James.
Speaker 3 (18:41):
Let's look at Astralia's biggest corporate collapse since virgin This
week Hospitals Group Healthscapes lenders finally called in the receivers
and when it's sold as soon as possible to try
and recoup as much of their loans as they can.
Speaker 2 (18:52):
James.
Speaker 3 (18:52):
This collapse has been a while in the making, own
a brook Field by one of its private equity funds,
pay too much and lumped Healthscape with too much debt
and rent to survive any longer. Brookfield invested in June
twenty nineteen and officially loses control this week. It will
dust all of its investment, estimated it to be about
two billion dollars, and likely cause Healthscapes, banks and landlords to.
Speaker 2 (19:14):
Dust some cash as well. James.
Speaker 3 (19:17):
This is a sad corporate story. I mean, it's a
very important company, second biggest private hospital's owner in Australia,
huge part of the elective surgery production line in particular.
It's gone under. Its future is now up in the air.
Australia is probably a little bit poorer for it now.
It's a tempting to blame Healthscape's private equity owned Brookfield
for pushing it too hard on this investment. Do you
(19:39):
think this was Brookfield's fault?
Speaker 1 (19:40):
Well, Anthony, you put him in the private equity Hall
of shame a few weeks ago, so I'd find that
hard to argue with. I mean, I think you said
it right. They paid too much, They loaded up with
too much debt, and they change the sort of nature
of the cost base where they got stung by a
big shift instructural costs around rent and also wages. Now,
(20:03):
did Brookfield see the pandemic coming which unleashed all this inflation? No,
you know, fair enough, But things happen in business. You
need to have a business that can withstand a little
bit of change or a lot of change. Actually, and
this business just hasn't been out of cope with it.
Other businesses have. But the debt and the rent agreements,
particularly of just hamstrung this business. So look, I think
(20:27):
Brookfield has to take the line and share of the
blame here. There are some big structural changes in healthcare.
We don't like going to have overnight stays in hospital anymore.
We like going for day days, and they are eight
times cheaper than staying in overnight, and so Brookfield suffered
a bit from that. There's a question about whether the
(20:48):
private health insurers are sharing enough of their profits to
support the sector. I think that's a legitimate question that
we'll see debated. But look, I mean, the company that
signs the check has to be the one that bears
alts responsibility, I think, and Brookfield's in that position. It's
not comfortable, but that's the way it goes. I guess
we can keep doing the post mortem forever. But what
(21:10):
matters now for you know, the people who are booked
in for surgery in the next few weeks. What matters
now is what happens next. So are there potential bidders
ready to come forward? They've had months to get ready.
Are they going to suddenly step forward and pay a price,
make a half decent bid and keep this thing going.
Speaker 3 (21:29):
Receiverships should help James, like it really does. I mean,
it puts a timeframe on it, puts certain around the outcome.
You know, receivers there to sell it. This is for sale.
This is not Brookfield flying kites, which we've seen in
the past. You know, this gets the lenders together, gets
the landlords together, gets Brookfield out of the way, gets
Healthscope out of the way, gets Healthscope board out of
the way, and says we're doing something like deals like
(21:52):
this really are like hurting cats. You need to get
everyone on the same page at the same time, and
it's so hard to do. Sometimes it's just easy when
you've got an outsider and outsider with sort of legal
responsibilities and someone that the court will back if they
have to, to take a side here and get something done.
Speaker 2 (22:10):
And that's what's happened with the receiver James.
Speaker 3 (22:13):
Healthscope CEO this week Tino, who's been He told both
of us if Healthscope has three problems, receivership is the
best way to fix two of them, too much debt
and too much rent. The third one, which you just said,
then the structural issues in the healthcare system. Basically, we
have more private hospital beds than we need for now
at least, which is quite amazing if you think about
our aging population total and the demands and you hear
(22:37):
hospitals are overrun. All that sort of stuff that can't
be fixed by receivership. The fact that, like you said,
the models of care, the people not doing as many
nights in hospital that can't be fixed by receivership. The
fact that private hospitals are getting less of the private
money that goes into the private health sector than they
used to, about a billion dollars less according to Ramsey Healthcare.
That can't be fixed by receivership either. So there's still
(23:00):
some problems there that whoever it is that ends up
owning these hospitals is going to have to deal with.
Receivership won't change any of those, but it should act
as a lightning rod, perhaps for the industry, but most importantly,
it'll bring all the parties together.
Speaker 2 (23:15):
In terms of this actual deal.
Speaker 3 (23:17):
Now, James, perhaps a surprising thing, given what we've seen
in some other situations in the past year or two,
is that the government has pretty much stayed out of
this one. You know, he sat back and it's let
a business fail here. Yeah, yeah, Do you think that's
a good thing or not?
Speaker 1 (23:32):
Well, Look, I mean we've been critical of the government
stepping into buy a crappy steel plant in Wuyela and
a pretty crappy regional airline called Rex, so you know
we shouldn't. We can't slam the government for staying out here. Look,
it was very deliberate. The health Minister Mark Butler. He
made it clear that there was no way he was
going to step in and use taxpayer money to fund
(23:54):
a private equity back to business, and he was very
clear about that. I think he even said a foreign
private equity back to business. So the government wants Brookfield
out of the way too. And so now they've cleared
the decks. So the opportunity is there at least for
the government to come in and start fixing some of
these big problems. But they're going to need to. You know,
this isn't just going to heal itself. Butler called I
(24:16):
didn't get this. But Butler called health scope and outlier.
It's not an outliner. Yeah, private hospitals are struggling big time.
And so unless there's a bit of industry reform, unless
they sort of use this as the lightning rod, as
you say, then we could have another hospital back in
the Sick Bay in the not too distant future. So
(24:37):
which brings us, Anthony to what are the lessons here?
What are the lessons for the country, for investors, even
for the health system.
Speaker 3 (24:44):
Oh, James, you know me, and my mind goes straight
to deals, the way deals are done, the way these
private equity bids sort of work. Yeah, Australia has this
thing for assets with infrastructure like properties. All these businesses,
they're operating businesses. But anything with a government contract earnings
that can be called defensive. The financial engineers can't help themselves,
(25:06):
but look at this and say, it's infrastructure like that
means we can pay a lot for it. We can
load it up with debt, we can run it on
a shoe string budget. We can get earnings going up
and then float it back on the ax the suckers
out the other side and make some easy money. James,
this one makes you think twice. You know that such
a defensive business could go bust is almost unimaginable. If
(25:27):
you're talking about an investment grade type structure industry player
coming in with industry player like debt to equity ratios,
it just wouldn't go bust, right, But it's completely understandable
when you get your head around the financial engineering the
Brookfield had to do just to get this deal done
in the first place, and then pile on what happened
in the industry soon after, like you said, COVID, the
(25:49):
structural change, etc. So I think it should provide a
bit of pose thought really, like what is infrastructure? What
sort of businesses should you load up with? Fixed costs
like rent and interest payments? How defensive are hospital earnings?
You know?
Speaker 2 (26:02):
What comes with being the government.
Speaker 3 (26:04):
Back sector like private hospitals which wouldn't exist at such
scale if we're not for the government mandated and funded
private health insurance system and not medicare. What responsibilities come
with that in tough times? Like can you just cut costs?
Can you get your way through things like you might
normally do for a less important business?
Speaker 2 (26:22):
For me, that's one of the lessons.
Speaker 3 (26:23):
I mean.
Speaker 2 (26:23):
The other thing we've.
Speaker 3 (26:24):
Heard a little bit this week people saying about FERB,
the Foreign Investment Review Board, which looks at all foreign
investment in Australia or big ones and property at least,
and perhaps they should have a good hard look at themselves.
Why did they let such a big deal on a
systemically important business like Healthscope happen in the first place
(26:45):
in twenty nineteen. It's a good question, right, because first
jobs protect the national interest, but normally we see that
along security lines. Yeah, you know, Chinese buyers have been
ruled out of buying electricity networks for example, or pockets
of national interes. We normally think like the farmers graincop
wasn't allowed to be brought by the Canadians because they
were worried about the farmers and what it would do
(27:07):
to grain supply and the way the grain was moved
around in regional areas. But what about bitters blowing themselves
up financially on important assets?
Speaker 2 (27:15):
Should that be a category?
Speaker 1 (27:17):
I don't know. I mean, how does FERB look into
the future and say, what if there was a pandemic
that sent inflation up to nine percent? Is that realistic?
Speaker 2 (27:26):
Anthony? I don't think it is. No, I don't think
it's realistic at all.
Speaker 3 (27:30):
And if we're getting FERB to be a ruler over
financial structures like that, I think the country's lost the
plot personally.
Speaker 1 (27:37):
Can I give you one lesson?
Speaker 3 (27:39):
Yep.
Speaker 1 (27:39):
So every year the government, the health minister comes out
and sits tells us how much private health insurance premiums
are going to rise by Now that health minister likes
his job, he wants to be voted in back next time.
He never puts through an increase that's probably what it
should be. He always tries to get that increase as
low as possible. But the problem is, as with lots
(28:01):
of things in Australia, we sort of never want to
pay for what something's actually worth or actually required, and
so we strangle the amount of funding at the sort
of top of the funnel, and then we set the
insurers and the private hospitals against each other to try
and fight as hard as they can for that artificially
constrained pool. I think we've just got to figure out
(28:22):
we are getting older, we will get sicker, it is
going to cost more, and we've sort of got to
cop that. And at the moment we've got this system
where we don't let that price signal flow through to
the market. We let a bloke who wants to get
reelected or a person who wants to get reelected, we
let them control where the prices are set. So I
think that's an issue too. Mark Fitzgibbon, who used to
(28:45):
run the health insurer NB, he says, get an independent
umpire to do that job, take it out of the
hands of the politicians. I reckon that's a good start
to Yeah, well said, all right, we'll be back after
the break, Anthony. We're getting a very important health check
for the Australian economy next week back in a second, Well,
(29:14):
welcome back. If you want to know more about what
we're talking about today, and a whole lot more. AFR
subscribers can sign up to the Chanticleer newsletter at join
dot AFI dot com forward slash Chanticleia. Every Saturday morning,
the newsletter pulls together the best Chanticleer columns from the
week and delivers them straight to your inbox. All right, Anthony,
we mentioned on Tuesday where we will be up in
(29:35):
Sydney for the AI Summit. I think it's sold out.
It is going to be really good. Isn't it a
really good sense check of where we're actually at?
Speaker 3 (29:42):
Oh? Totally, such good timing for it, James. There's lots
and lots happening, as we've spoken about earlier.
Speaker 1 (29:46):
Absolutely, on Wednesday we get GDP growth figures here in Australia. Now,
we saw the inflation number monthly inflation read during the week.
It came in a little bit hotter than we expected.
Does that mean a July the rate cut is off
the table, Anthony?
Speaker 2 (30:02):
Do you think potentially?
Speaker 3 (30:03):
I mean, as for this GDP number, I saw a
JP Morgan, we're expecting point three percent quarter on quarter growth,
which sounds all right, James, But remember the RBA is
expecting two point one percent for this calendar year. So yeah,
if we are going to hit two point one percent
for twenty twenty five, sounds like we're going to need
it to pick up in the second half. Yeah.
Speaker 1 (30:21):
Well, I mean Paul Bloxham, who's the former RBA economist
now at HSBC. He says the maximum, the maximum the
economy can grow is two percent now and he reckons
where we've really got an issue. So this GDP number
is going to be really interesting to see. All Right,
on Friday night, we're going to get us job numbers,
which leads us into our question for the week. We
(30:42):
love questions here at the podcast. Our question this week
is from inz Zine from Wollongong. You've got a question
you want to send in, you can email us at
chanticleer at afi dot com. You can also send us
a question in audio form by recording a voice memo
on your phone. Just include your name and where you're
from and email.
Speaker 2 (30:58):
It to us.
Speaker 1 (30:59):
And of course some of you will have noticed that
there's now a widget that allows you to ask questions
on every chant of clear article on AFI dot com.
We're getting great questions through there. Please keep them coming
and we'll get to as many as we can. Let's
hear from an.
Speaker 4 (31:12):
As Anthony and James. I was wondering with the whole
US situation. Could you outline the best in worst case
scenarios what would happen if US became debt free? And conversely,
what would happen if the US government went bankrupt? How
did this effict Australia? Thanks, and he's from Wollongong and A.
Speaker 1 (31:31):
That's a great big picture question, Anthony.
Speaker 3 (31:33):
You want to start all right, let's sing about the
US being debt free. The US's debt was worth one
hundred and twenty four percent of GDP last year, one
point twenty four times GDP, so it had US thirty
six trillion dollars in debt and the GDP so that
economic activity of the country was worth US twenty nine trillion.
Speaker 2 (31:51):
That's a lot of debt, James.
Speaker 3 (31:53):
Now that debt would take a lot of repay just
to pay the interest on that debt. Don't even worry
about paying off the debt. Just to pay the interest
on that debt. They're looking at close to a trillion dollars.
Yeah a year now, James. Remember the US budget deficit
is running close to US two trillion dollars a year,
so the debt's actually getting bigger. The interest costs are
going up so unfortunately. As I just I find it
(32:17):
really hard to see how that debt's.
Speaker 2 (32:19):
Going to be paid off in full.
Speaker 3 (32:20):
If it does happen, it's going to take It's hard
to see it happening in our lifetime. It's going to
take a while unless they've got an inheritance from a
richar in Saudi Arabia or something. It's just so hard
to see it paid down via repayments. I mean the
way it could get debt free then via some sort
(32:41):
of restructure where the lenders get wiped out like yacks.
That is, take your cash out and hide it under
the mattress type bad. That is end of day stuff
in terms of financial markets.
Speaker 1 (32:53):
Yeah, I mean, I think the best scenario it ads
is that the government doesn't have to pay down its
debt immediately or even in a hurry, or even entirely.
Like a bit of debt for like any household or business,
a bit of debt is actually a bit useful. Let's
you do things. So the best scenario I think at
the moment would be if the government recognized the problem
(33:14):
and sort of committed to tackling it over the long term.
If it does that, then the people, the bond holders,
the people who lend the US government money every ten minutes,
they would say, look, okay, we get it. You know,
the US is a responsible borrower. They're doing the right thing.
They get the problem, They're going to attack it. That
(33:35):
would be the best situation because the cost of money
would fall. But at the moment we've got the cost
of money rising. It's quite high, and that's because the
bondholders don't believe that the government wants to be responsible.
They're just seeing them spend like a drunken sailor and
cut taxes. So could the US government go bankrupt. It's possible, again,
(33:58):
extraordinarily unlikely. I've seen countries go bankrupt before where they
can't meet their debt repayments, and as Anthony says, that
is just crazy for the bondholders. They would push the
price of money through the roof, and that would come
back to bite Australia because all of our banks, for example,
they have to go into international bond markets to raise money,
(34:20):
and they would need to pay a higher prevailing price
for that money. And guess what, the banks just wouldn't
eat that cost. They would pass it through to borrowers
down here, and so the cost of money would go
up for the entire world. So I mean, that's why
the bond market matters, Anthony. That's why when we hear
these stories about people becoming worried about the American debt situation,
(34:42):
it actually does matter to Australia eventually, and so we
want it to get We want them to get it
sorted out as well.
Speaker 3 (34:48):
Right, absolutely, if the US goes broke, that's like hellscope
times are gazillion.
Speaker 1 (34:55):
Yeah, well said Anthony. Well, Anthony, before we go today,
we wanted to take a moment to pay tribute to
an integral member of the Chanticleer podcast team, and indeed, Anthony,
the leader of the AFRs podcast division, lap Fan, who
is our super producer and the head of podcast here
at the Finn, is very sadly leaving us to start
a new chapter with his beautiful family in Vietnam. Now,
(35:17):
Laps just a brilliant guy. He's calm, he's enthusiastic, he's energetic,
and he's relentlessly positive. He's just a great guy to
work with. But I think it's really important to recognize
the role he's played in building up the Finns podcasts.
From the very first podcast we did, which was an
award winning series called The Sure Thing. Go and check
(35:38):
it out if you haven't listened, Lap's been the champion
of the format inside the finn Now. He's held the
hands of countless reporters like us trying to make the
format work for the first time. He's worked tirelessly with
advertising and marketing and editorial. He's experimented with different formats
and ideas, and he's helped bring tens of thousands of
(35:58):
new listeners and read into the AFAR fold. I think
Anthony being first through the door, being a pioneer of
something is often really hard work and it's sometimes thankless.
But Lap, your contribution to the AFR is mighty, and
the fact that you've done it with a big, passionate
smile on your face is what we'll remember most.
Speaker 2 (36:19):
Here, James.
Speaker 3 (36:19):
I mean the Seant Clear pod. It wouldn't be here,
wouldn't have done as well without Lap. Of all the
things that the financial reviews tried in.
Speaker 2 (36:26):
The past decade.
Speaker 3 (36:27):
I Reckon podcast is right up there in terms of
the success and a lot of that credit has to
go with LAP is endless energy, enthusiasm, ideas and pursuit
of what is a really good form and something that
our readers and our listeners have really responded to. So yeah, On,
behalf of you, James On, behalf of our other super
producer Alex Goer and myself. We'll really miss you, Lap,
(36:49):
and we can't wait to come and record a live
pod in Vietnam on our next world tour.
Speaker 1 (36:54):
Well, we'll see you later, Lap, and we'll see you
all next week. Thanks a lot for listening. If you
like the podcast and you want to hear more, consider
sharing or giving the podcast a review, as it helps
other listeners find us, and don't forget to follow wherever
you get your podcasts. At The Financial Review, we investigate
the big stories about markets, business and power. For more,
(37:17):
go to afar dot com and you can subscribe to
The Financial Review The daily Habit of successful people at
afar dot com slash subscribe. Chanticleer was hosted by me,
James Thompson and Anthony McDonald and it's produced by Alex
Gau and lap Fan. A theme is by Alex Gou,
head of podcast is lap Fan and the head of
premium content is Fiona Buffini. The Australian Financial Review
The Australian Financial Review. Hello, I'm James Thompson, senior chanticleer
columnist at the AFI. Welcome to our weekly news breakdown
of all things business, finance and markets with me to
day as always as my chanticleer colleague. He's worth more
(00:25):
than all the shares in Australia's second biggest hospital company
put together. It's Anthony McDonald. How are you, Anthony?
Speaker 2 (00:31):
Yeah, Fortunately no one and a half billion dollar loan
to here.
Speaker 1 (00:33):
Jameson absolutely well. This week we reveal what the new
strategy of one of Australia's biggest companies tells us about
the coming AI boom. We take you inside the biggest
corporate collapse since the pandemic, and we explain the new
theory moving the market, the Taco theory. But Anthony, let's
(00:54):
start with the government decision that's going to shape the
country for I don't know forty years. The approval to
extend the Northwest Shelf liquefied natural Gas project, which is
operated by Woodside up there in Western Australia. Now, Anthony,
the Environment Minister Murray Waite, he was pretty open that
this was going to make people unhappy. Whatever his decision,
was Did he get it right though.
Speaker 3 (01:15):
Well, there's definitely a spicy meat ball of a decision,
and yeah, I think it's right. But I mean it's
so controversial because it's gas, fossil fuels, climate change's big business.
I mean, you're never going to make everyone happy. I mean,
in a perfect world, the whole world would have already
transitioned from gas and off all fossil fields. We wouldn't
even be having this conversation, and would beyond the renewable energy,
the extension of the Northwest Shelf would be a no brainer,
(01:37):
wouldn't even be needed.
Speaker 2 (01:38):
But James, we're just not there.
Speaker 3 (01:40):
So we've come around to or realize we're not in
this perfect world and the energy transition is not going
to be a perfect thing. And the world needs gas.
Australia has gas. Australia needs gas and we need it
so badly that we're building an import terminal just south
of Sydney here, James, which is quite unbelievable really, And
there's another one in planning for Downagel Long. But I
(02:00):
think this decision, James, was a pragmatic one. You know,
the Labor government, they really changed their message on gas
in the past year or so. It is the transition
feel for the next few decades. And if you're okay
using it here in Australia, James, you've got to be
okay extracting it, don't. I think that's what this comes
down to. And it's something we do well at Northwest Shelf.
It's been operating for decades. This an extension of it.
(02:22):
It's a very very big extension. It's our third biggest export.
It's good for the country in terms of the country's
balance sheet. So yes, the right decision.
Speaker 2 (02:30):
What do you think?
Speaker 1 (02:31):
Yeah, Look, I think we've been talking for a while
on the podcast about how inflation changes everything. It's changed
the outcome of all these elections. Most of the incumbents
got kicked out because of high inflation, Anthony Alben Easy
being the notable exception. But the inflation story has changed
the government's few on gas. In the last couple of years,
it's become clear that because of inflation in the general populace,
(02:55):
the cost of living going up, and because of particularly
inflation and construction costs, the energy transition is not going
in the way we want it to or ultimately need
it too. It's just going to be slower and tougher
and more expensive than we thought. And when you've got
affordability problem, you know you need a transition fuel, as
(03:16):
you say, to try and get us from one point
to the other. Gas has something we've got lots of
and you can see in the last twelve months the
government's really changed their tune on gas. And Meg O'Neil,
the CEO of Woodside, she said exactly that the conversation
has changed in the last couple of years as people
are looking at their power bills and going, hang on,
why is this going up so far? Don't we have
(03:37):
lots of energy here in Australia. So I think you're
right pragmatic decision. Does the Northwest Shelf go for another
forty years out to twenty seventy Well hopefully not, I guess,
but you know that this gives Woodside the certainty it
needs to invest certainly over the next couple of decades.
So it's the one thing Anthony has taken six and
a half years to get this approval in place. That
(04:00):
can't be right, That can't be good for any business
in Australia. That is something that we need to learn
out of this episode. We've got to move faster on
this stuff.
Speaker 3 (04:08):
Yeah, just quickly, James, for the Chuck hard Cares out there.
Can you think of a busier company in Australia in
the past five years? The mood Side, you know, it
bought BHP's petroleum business in a really rare script deal
I was worth tens of billions of dollars, tried to
buy Santos, sold a half share in its plutou up
there in the Northwest.
Speaker 2 (04:26):
As well.
Speaker 3 (04:26):
When Global LNG last year, when it brought into a
US project called Driftwood, it now wants to develop that
that's going to cost tens of billions of dollars. Yeah,
it bought a clean ammonia project in the US that's
another two and a half billion dollars US last year,
and now it has this Northwest shelf extension and James
I saw cities analysts saying that could be a twenty
five billion dollar development. It's huge, huge maneuvering from a
(04:48):
company that's supposed to be in a sunset industry, whose
shareholders voted against this climate plan last year, who's some
of whose sharhold has tried to kick the chairman, Richard
Goiter out last year.
Speaker 2 (04:58):
There's so much going on there.
Speaker 1 (05:00):
True, but I think that's the nature of the beast.
You know that this energy transition is happening, it needs
to happen. It's it's all over the shop, and so
Woodside is going to be here, there and everywhere. I
think that's what you'll that's what will continue to see
that they're going to be need to be very nimble
as this as this plays out.
Speaker 3 (05:16):
Okay, James has been killing me since the start of
this episode. What the hell is the tarco theory?
Speaker 1 (05:21):
The tarco theory? Anthony was introduced to me by Anthony Scaramucci,
the Mooch, who was famously Donald Trump's press secretary for
I think nine days in the first Trump administration. I
spoke to him a couple of weeks ago and he said,
everyone over here is talking about the taco theory. Trump
always chickens out. And since since the Mooch told me
(05:45):
about this a couple of weeks ago and I put
it in there, He's right, it's everywhere. Because Trump suddenly
backed out of these tariff threats against China and against
the EU, and investors just expect that he's going to
back out on all these tariff and trade policies now.
Interestingly enough, Anthony on Wednesday night, it's a very brave
(06:07):
reporter in the Oval Office said Trump, excuse me, mister President,
have you heard of the taco theory?
Speaker 2 (06:13):
Really?
Speaker 1 (06:13):
And he said, that's a nasty question. He said, it
might look like chickening out to you, but it's just
good negotiating. Well, I'm sorry, Donald, but the market doesn't
believe you, mate. They have just decided that you are
going to keep backing out of these big threats that
you've made. Doge is dead. The restrictions on government spending
(06:33):
they're gone, the tariffs they look like they're gone. And
so here we are, the markets surging, We're back above
the levels we were at Liberation Day. The Wall Street's
only off three percent from its all time highs. No,
it's party time out there, Anthony. Does it feel quite
right to you that it's party time?
Speaker 3 (06:53):
Not really, But I do like your taco theory. Trump
always chickens out. Tariffs are coming off, keep the taco
is going. It's highly ententitating, isn't it.
Speaker 1 (07:05):
Yeah, it's like a Goose Marti Gomez restaurant in here
at the moment. Isn't it Alright, Anthony, let's get to
our first big topic. And on Tuesday we've got a
glimpse into the future when the telecommunications giant Telstra took
the wraps off its new five year strategy. Now, Telstra,
as we all know is it's a true giant of
Australian business. There really wouldn't be too many of us
(07:26):
who don't use its network or its digital infrastructure in
one way, shape or another. And as we all become
more connected, demand for that network and that infrastructure is
only going in one direction. The amount of data going
across the network in the past five years has tripled.
And if you think of all the stuff you do
on your phone, you can understand that. But Anthony, Telstra's
(07:48):
got a problem, doesn't It Demands through the roof, investments
through the roof, but Telstra is barely getting a return
above its cost of capital. Anthony, tell us a little
bit about what the cost of capital means and why
have Telstra's returns been so poor?
Speaker 2 (08:04):
Well, James has been like this for years.
Speaker 3 (08:05):
Like Telstra started out with a role gold network owned
by the government, subsidized by the government, regulated, lots of
political pressure to keep it roll gold service all parts
of Australia, you know, the remote and rural stuff. It's
a cost center, not a profit center for Telstra, and
still is. I mean Telstra's problem is that it's had
to keep investing in this network. You know, three G,
(08:26):
four G, five G, all that Capex James. It means
it's got a premium network, the biggest invest in Australia,
and if allays fair in love and war, it should
be able to charge premium prices and you know, really
really premium prices. But you know, the two b competitors
opt in Vodaphone. While they're small competitive Telstra, they do
keep it honest totally. They keep things pretty competitive in
(08:46):
the sector. I mean their network works fine for most
Australians for most jobs. They do their best to keep
the prices low, keep the pressure on Telstra. So Telstra
is this big, big gorilla, but the other two have
got networks that are competitive at least and that sort
of keeps a bit of a cap on Telstra's prices.
So this constant reinvestment from Telstra, combined with the pricing pressure,
(09:10):
combined with the regulatory and political pressure which is still
there a couple of decades on from the privatization means
it Telstra hasn't been able to really get the returns
it should have on these really valuable assets. Now, the
cost of capital is how much it costs Telstra to
borrow how much it should cost capital to spend shareholders money,
like what the return is that shareolders they expect, and
(09:31):
the returns that shareholders makes the profit It just isn't
enough to cover those numbers. Now, in the past, if
you bought Telstra shares, you weren't really buying it for
its profits, right, You're buying it for its dividend, right,
and you expected it to make normally twenty eight cents
a year in dividends it would pay out. You didn't
worry so much about the capital growth which would come
from the earning scrace and everything, and you just milk
the dividends for what they're worth own it for that. Now,
(09:54):
if you've owned Telstra shares and lots of strains did,
and I think more than one millions still do, it's
been a pretty sluggish ride, which is ironic, James, isn't
it Because the company at its heart it's about technology.
Speaker 2 (10:07):
Yeah, it's technology.
Speaker 3 (10:08):
Infrastructure, and what's been a better place to invest in
the past decade than technology and tech infrastructure. So it's
been a big problem for Telstra James. That leads to
the obvious question, what's the CEO, VICKI Brady. What's she
going to do about it?
Speaker 1 (10:22):
Well, look, the first thing she's going to try and
do is, over the next five years, get Telstra's return
on invested capital from about eight percent at the moment,
which is barely washing its face, up to about ten percent,
and that would be absolutely industry leading in the telco
sector around the world. How is she going to do it? Well, Anthony,
I'm sorry to say, she's going to make you pay.
(10:43):
You're going to make us all pay. Look, I mean,
at the heart of this is exactly what you said.
Telshra's got a premium network. All Telstra's customers tell it
all day and all night that it's got a premium network.
It dominates the mobile business. Particularly. What Brady needs to
do is extra track the right amount of return for that.
So what we'll start to see over the next five
(11:04):
years is Telstra sort of offering attributes of that network
that people can buy if they need an extra premium service.
I'll give you a couple of examples. Let's say you're
a you know, you love streaming movies on the go,
so you need a really good, really high quality, reliable
(11:24):
service for that. Well, telstrall make you pay a little
bit extra for that extra reliability. You're a food vendor
right at a big music festival. The one thing it
can't go down is your payment system, so you might
pay a little bit extra for a guaranteed spot on
the network to make that work. You're a business that
does artificial intelligence stuff. You need really low latency. You
(11:47):
want the bits and the bytes going down the pipes
really quickly, so you know you'll pay a bit of
extra for that. The idea, Brady says, is to sort
of have a good, better, best service and charge people appropriately.
Now that is done, and in every sector you can
think of, there's a tiered pricing model. It hasn't been
(12:07):
done in telcos. They haven't been good at it. Basically
they've built the network and said, look how good this
thing is. You know, we might change your data inclusions
or your data speeds a little bit, but that's that's
that's all. So this is a bit of a step
change for Telstra, and as more and more data goes
down these pipes, as more and more of us become
reliant on the network, it wants to get a return
(12:28):
for that, and its shareholders do too.
Speaker 2 (12:31):
You know what Teestra could do, James, what's that?
Speaker 3 (12:33):
For the ones that are into streaming and for the movies,
they could make the first movie free and it could
be Jerry maguire And you can sit there listen to
someone saying, show me the money, Show me the money, and.
Speaker 2 (12:42):
Then everyone can understand what Telstra's on about.
Speaker 1 (12:44):
I think they'll have a much more subtle slogan than that.
Speaker 3 (12:47):
Yes, but James, you promised us AI. Where does this
new revolution come into for Telstra?
Speaker 1 (12:53):
Well, look, I mean obviously it comes in through the
demand they expect to see across its network that's going
to be AI driven. But the message I got was
that what Brady's saying is that AI is not some
sort of experimental thing now is here. It's using AI
to do all sorts of things on its network. So
make sure that you know recognize patterns such that it
(13:16):
if its network goes down, it can quickly do maintenance.
It can do preventative maintenance. I mean one of the
interesting things. One of the big costs for Telstra is
power and petrol. So yes, you know you need a
lot of you need a lot of energy to keep
the network going. But every time there's an outage somewhere
on its infrastructure, someone gets in a truck and rolls
(13:38):
out there and goes and fixes it. So if you
can have AI monitoring and self healing they called it
the network, then you can save a lot of money
doing that. The other place you can save money is
if you can deploy AI into your workforce. Now we're
already seeing a little bit of that. When you ring
up Telstra and you get on the ring up the
(13:59):
coll center and got an issue, you know, it's a
pain in that pain bum No one likes that. Back
in the day, they used to have used to have
to manually enter the notes from that conversation. Now AI
does that for them automatically. Only saves the call center
person thirty or sixty seconds per episode, But when you're
doing millions of these a year, that starts to add up.
(14:20):
Brady was actually quite honest. She said, Look, in five years,
the Telstra workforce will be smaller than it is now.
Now We don't know how much smaller? Is it ten percent?
Is at five percent? Is it forty five percent? I
don't know when Vicky Brady doesn't know, which is fair
enough because the tech is developing very quickly here. But
we've got a big AI summit coming up next week, Anthony,
(14:43):
And to me, this is more proof that this stuff's
becoming very real, very quickly, isn't it. I mean, you
talked to one of our big data center leaders, Greg Goodman,
this week. Where does he think we are in this
sort of whole AI revolution.
Speaker 3 (14:59):
Ye, our data center leaders Greg Goodman. Now, James, that's
a sentence you wouldn't have said like a year ago,
let alone two years ago. It's amazing how much this
this space, to use Goodman Group's word, is changing. You know,
like this is a logistics company that develops warehouses, logistics parks,
that sort of stuff. Now it's really leap left into
data centers. And he says, it's hot, hot hot, you know,
(15:22):
red hot.
Speaker 2 (15:22):
You know what, while while we.
Speaker 3 (15:24):
Might think that the data centers stories come off the
boiler bit, he says, like on the ground, it's still
red hot.
Speaker 2 (15:30):
It's as hot as ever.
Speaker 3 (15:31):
And why it's just it's just the simple message we've
been hearing for a while now, James. It's that generative AI,
which is the AI that can create new content like text, images, music,
and video. And the data demand is going through the
roof the big software companies Amazon, Microsoft, Google, Meta, et cetera.
They're investing huge sums into AI, tens of billions of
(15:52):
dollars a quarter some of them, and they need data
centers to make that growth come true. Yeah, So, like
I said, he's gone from logistics parks to jump over
into data centers and he reckons He's going to have
five hundred megawat's worth a data center started by June
next year.
Speaker 2 (16:07):
Five hundred megawats is a lot.
Speaker 3 (16:08):
He's got one in Sydney at Artaman, just up the
road from North Sydney here.
Speaker 2 (16:11):
James got one down there for you in Melbourne. Take
out of Paris. Back of the envelope.
Speaker 3 (16:16):
Five hundred megawats is about five billion dollars worth of development, right,
so Goodman Group will find some of that itself. It'll
also bring in some capital partners. The names that it
brings in James's capital partners and the price at which
they come in or the return expectations at which they
come in in a I mean, that's the bit that
really shows you how hot this sector is.
Speaker 2 (16:35):
We don't really have that data yet, but.
Speaker 3 (16:39):
If Greg Goodman's to be believed, there's plenty of capital there.
It's just a matter of getting the timing right. But
for him, he says, for Goodman Group, they've got all
these developments. They've been working away at them in the
background for a bit, he said, You've got but they're
trying to do that prep work as fast as they can,
you know, securing the power, securing the approvals, getting all
(16:59):
the equipment. He said, there's not many holidays at Goodman
Group at the moment because there's this big opportunity there
and they're all rushing to get it out. Basically saying, look,
don't forget about the data centers theme. It is definitely
not dead. Yeah, fair enough, now, James, speaking of AI,
we had inn videos result this week. Can you tell
us about it quickly?
Speaker 1 (17:18):
Oh? Well, you and your generative AI Anthony, that's so
old hat. That's last week, mate. I'm onto agentic AI now,
which sounds even cooler, doesn't it. This is all about
AI agents now, AI agents they're the ones that they
can basically think for themselves. This is where you get
an AI agent that can reason, work through a problem,
(17:39):
and then take action. So you know, you might have
an AI agent that does summarizes the call center transcripts
or does some other role in videos. Ideas that we're
going to have a sort of virtual workforce of these
that you can just sort of pull off the shelf
and say, yep, take that one, Take that one, take
that one, And that's where we're moving now. To be fair,
(18:01):
that's where AO needs to move because the money is
not in mum and Dad sitting at home doing chap
GPT searchers on their next holiday. There's no cash in that.
The cash is going to come from businesses replacing human
workers with virtual workers. It's that simple. Well, it is
that simple, and it's that scary, and it's that exciting.
That's where Invidio says we are now and that's the
(18:24):
next part of this revolution. So watch out. I think
we're going to have a lot of fun at the
AI Summit next week chewing through some of what that
means for austrained society, because I'm going to have some implications.
Speaker 2 (18:36):
Oh yeah, there's a lot going on for our second
to be James.
Speaker 3 (18:41):
Let's look at Astralia's biggest corporate collapse since virgin This
week Hospitals Group Healthscapes lenders finally called in the receivers
and when it's sold as soon as possible to try
and recoup as much of their loans as they can.
Speaker 2 (18:52):
James.
Speaker 3 (18:52):
This collapse has been a while in the making, own
a brook Field by one of its private equity funds,
pay too much and lumped Healthscape with too much debt
and rent to survive any longer. Brookfield invested in June
twenty nineteen and officially loses control this week. It will
dust all of its investment, estimated it to be about
two billion dollars, and likely cause Healthscapes, banks and landlords to.
Speaker 2 (19:14):
Dust some cash as well. James.
Speaker 3 (19:17):
This is a sad corporate story. I mean, it's a
very important company, second biggest private hospital's owner in Australia,
huge part of the elective surgery production line in particular.
It's gone under. Its future is now up in the air.
Australia is probably a little bit poorer for it now.
It's a tempting to blame Healthscape's private equity owned Brookfield
for pushing it too hard on this investment. Do you
(19:39):
think this was Brookfield's fault?
Speaker 1 (19:40):
Well, Anthony, you put him in the private equity Hall
of shame a few weeks ago, so I'd find that
hard to argue with. I mean, I think you said
it right. They paid too much, They loaded up with
too much debt, and they change the sort of nature
of the cost base where they got stung by a
big shift instructural costs around rent and also wages. Now,
(20:03):
did Brookfield see the pandemic coming which unleashed all this inflation? No,
you know, fair enough, But things happen in business. You
need to have a business that can withstand a little
bit of change or a lot of change. Actually, and
this business just hasn't been out of cope with it.
Other businesses have. But the debt and the rent agreements,
particularly of just hamstrung this business. So look, I think
(20:27):
Brookfield has to take the line and share of the
blame here. There are some big structural changes in healthcare.
We don't like going to have overnight stays in hospital anymore.
We like going for day days, and they are eight
times cheaper than staying in overnight, and so Brookfield suffered
a bit from that. There's a question about whether the
(20:48):
private health insurers are sharing enough of their profits to
support the sector. I think that's a legitimate question that
we'll see debated. But look, I mean, the company that
signs the check has to be the one that bears
alts responsibility, I think, and Brookfield's in that position. It's
not comfortable, but that's the way it goes. I guess
we can keep doing the post mortem forever. But what
(21:10):
matters now for you know, the people who are booked
in for surgery in the next few weeks. What matters
now is what happens next. So are there potential bidders
ready to come forward? They've had months to get ready.
Are they going to suddenly step forward and pay a price,
make a half decent bid and keep this thing going.
Speaker 3 (21:29):
Receiverships should help James, like it really does. I mean,
it puts a timeframe on it, puts certain around the outcome.
You know, receivers there to sell it. This is for sale.
This is not Brookfield flying kites, which we've seen in
the past. You know, this gets the lenders together, gets
the landlords together, gets Brookfield out of the way, gets
Healthscope out of the way, gets Healthscope board out of
the way, and says we're doing something like deals like
(21:52):
this really are like hurting cats. You need to get
everyone on the same page at the same time, and
it's so hard to do. Sometimes it's just easy when
you've got an outsider and outsider with sort of legal
responsibilities and someone that the court will back if they
have to, to take a side here and get something done.
Speaker 2 (22:10):
And that's what's happened with the receiver James.
Speaker 3 (22:13):
Healthscope CEO this week Tino, who's been He told both
of us if Healthscope has three problems, receivership is the
best way to fix two of them, too much debt
and too much rent. The third one, which you just said,
then the structural issues in the healthcare system. Basically, we
have more private hospital beds than we need for now
at least, which is quite amazing if you think about
our aging population total and the demands and you hear
(22:37):
hospitals are overrun. All that sort of stuff that can't
be fixed by receivership. The fact that, like you said,
the models of care, the people not doing as many
nights in hospital that can't be fixed by receivership. The
fact that private hospitals are getting less of the private
money that goes into the private health sector than they
used to, about a billion dollars less according to Ramsey Healthcare.
That can't be fixed by receivership either. So there's still
(23:00):
some problems there that whoever it is that ends up
owning these hospitals is going to have to deal with.
Receivership won't change any of those, but it should act
as a lightning rod, perhaps for the industry, but most importantly,
it'll bring all the parties together.
Speaker 2 (23:15):
In terms of this actual deal.
Speaker 3 (23:17):
Now, James, perhaps a surprising thing, given what we've seen
in some other situations in the past year or two,
is that the government has pretty much stayed out of
this one. You know, he sat back and it's let
a business fail here. Yeah, yeah, Do you think that's
a good thing or not?
Speaker 1 (23:32):
Well, Look, I mean we've been critical of the government
stepping into buy a crappy steel plant in Wuyela and
a pretty crappy regional airline called Rex, so you know
we shouldn't. We can't slam the government for staying out here. Look,
it was very deliberate. The health Minister Mark Butler. He
made it clear that there was no way he was
going to step in and use taxpayer money to fund
(23:54):
a private equity back to business, and he was very
clear about that. I think he even said a foreign
private equity back to business. So the government wants Brookfield
out of the way too. And so now they've cleared
the decks. So the opportunity is there at least for
the government to come in and start fixing some of
these big problems. But they're going to need to. You know,
this isn't just going to heal itself. Butler called I
(24:16):
didn't get this. But Butler called health scope and outlier.
It's not an outliner. Yeah, private hospitals are struggling big time.
And so unless there's a bit of industry reform, unless
they sort of use this as the lightning rod, as
you say, then we could have another hospital back in
the Sick Bay in the not too distant future. So
(24:37):
which brings us, Anthony to what are the lessons here?
What are the lessons for the country, for investors, even
for the health system.
Speaker 3 (24:44):
Oh, James, you know me, and my mind goes straight
to deals, the way deals are done, the way these
private equity bids sort of work. Yeah, Australia has this
thing for assets with infrastructure like properties. All these businesses,
they're operating businesses. But anything with a government contract earnings
that can be called defensive. The financial engineers can't help themselves,
(25:06):
but look at this and say, it's infrastructure like that
means we can pay a lot for it. We can
load it up with debt, we can run it on
a shoe string budget. We can get earnings going up
and then float it back on the ax the suckers
out the other side and make some easy money. James,
this one makes you think twice. You know that such
a defensive business could go bust is almost unimaginable. If
(25:27):
you're talking about an investment grade type structure industry player
coming in with industry player like debt to equity ratios,
it just wouldn't go bust, right, But it's completely understandable
when you get your head around the financial engineering the
Brookfield had to do just to get this deal done
in the first place, and then pile on what happened
in the industry soon after, like you said, COVID, the
(25:49):
structural change, etc. So I think it should provide a
bit of pose thought really, like what is infrastructure? What
sort of businesses should you load up with? Fixed costs
like rent and interest payments? How defensive are hospital earnings?
You know?
Speaker 2 (26:02):
What comes with being the government.
Speaker 3 (26:04):
Back sector like private hospitals which wouldn't exist at such
scale if we're not for the government mandated and funded
private health insurance system and not medicare. What responsibilities come
with that in tough times? Like can you just cut costs?
Can you get your way through things like you might
normally do for a less important business?
Speaker 2 (26:22):
For me, that's one of the lessons.
Speaker 3 (26:23):
I mean.
Speaker 2 (26:23):
The other thing we've.
Speaker 3 (26:24):
Heard a little bit this week people saying about FERB,
the Foreign Investment Review Board, which looks at all foreign
investment in Australia or big ones and property at least,
and perhaps they should have a good hard look at themselves.
Why did they let such a big deal on a
systemically important business like Healthscope happen in the first place
(26:45):
in twenty nineteen. It's a good question, right, because first
jobs protect the national interest, but normally we see that
along security lines. Yeah, you know, Chinese buyers have been
ruled out of buying electricity networks for example, or pockets
of national interes. We normally think like the farmers graincop
wasn't allowed to be brought by the Canadians because they
were worried about the farmers and what it would do
(27:07):
to grain supply and the way the grain was moved
around in regional areas. But what about bitters blowing themselves
up financially on important assets?
Speaker 2 (27:15):
Should that be a category?
Speaker 1 (27:17):
I don't know. I mean, how does FERB look into
the future and say, what if there was a pandemic
that sent inflation up to nine percent? Is that realistic?
Speaker 2 (27:26):
Anthony? I don't think it is. No, I don't think
it's realistic at all.
Speaker 3 (27:30):
And if we're getting FERB to be a ruler over
financial structures like that, I think the country's lost the
plot personally.
Speaker 1 (27:37):
Can I give you one lesson?
Speaker 3 (27:39):
Yep.
Speaker 1 (27:39):
So every year the government, the health minister comes out
and sits tells us how much private health insurance premiums
are going to rise by Now that health minister likes
his job, he wants to be voted in back next time.
He never puts through an increase that's probably what it
should be. He always tries to get that increase as
low as possible. But the problem is, as with lots
(28:01):
of things in Australia, we sort of never want to
pay for what something's actually worth or actually required, and
so we strangle the amount of funding at the sort
of top of the funnel, and then we set the
insurers and the private hospitals against each other to try
and fight as hard as they can for that artificially
constrained pool. I think we've just got to figure out
(28:22):
we are getting older, we will get sicker, it is
going to cost more, and we've sort of got to
cop that. And at the moment we've got this system
where we don't let that price signal flow through to
the market. We let a bloke who wants to get
reelected or a person who wants to get reelected, we
let them control where the prices are set. So I
think that's an issue too. Mark Fitzgibbon, who used to
(28:45):
run the health insurer NB, he says, get an independent
umpire to do that job, take it out of the
hands of the politicians. I reckon that's a good start
to Yeah, well said, all right, we'll be back after
the break, Anthony. We're getting a very important health check
for the Australian economy next week back in a second, Well,
(29:14):
welcome back. If you want to know more about what
we're talking about today, and a whole lot more. AFR
subscribers can sign up to the Chanticleer newsletter at join
dot AFI dot com forward slash Chanticleia. Every Saturday morning,
the newsletter pulls together the best Chanticleer columns from the
week and delivers them straight to your inbox. All right, Anthony,
we mentioned on Tuesday where we will be up in
(29:35):
Sydney for the AI Summit. I think it's sold out.
It is going to be really good. Isn't it a
really good sense check of where we're actually at?
Speaker 3 (29:42):
Oh? Totally, such good timing for it, James. There's lots
and lots happening, as we've spoken about earlier.
Speaker 1 (29:46):
Absolutely, on Wednesday we get GDP growth figures here in Australia. Now,
we saw the inflation number monthly inflation read during the week.
It came in a little bit hotter than we expected.
Does that mean a July the rate cut is off
the table, Anthony?
Speaker 2 (30:02):
Do you think potentially?
Speaker 3 (30:03):
I mean, as for this GDP number, I saw a
JP Morgan, we're expecting point three percent quarter on quarter growth,
which sounds all right, James, But remember the RBA is
expecting two point one percent for this calendar year. So yeah,
if we are going to hit two point one percent
for twenty twenty five, sounds like we're going to need
it to pick up in the second half. Yeah.
Speaker 1 (30:21):
Well, I mean Paul Bloxham, who's the former RBA economist
now at HSBC. He says the maximum, the maximum the
economy can grow is two percent now and he reckons
where we've really got an issue. So this GDP number
is going to be really interesting to see. All Right,
on Friday night, we're going to get us job numbers,
which leads us into our question for the week. We
(30:42):
love questions here at the podcast. Our question this week
is from inz Zine from Wollongong. You've got a question
you want to send in, you can email us at
chanticleer at afi dot com. You can also send us
a question in audio form by recording a voice memo
on your phone. Just include your name and where you're
from and email.
Speaker 2 (30:58):
It to us.
Speaker 1 (30:59):
And of course some of you will have noticed that
there's now a widget that allows you to ask questions
on every chant of clear article on AFI dot com.
We're getting great questions through there. Please keep them coming
and we'll get to as many as we can. Let's
hear from an.
Speaker 4 (31:12):
As Anthony and James. I was wondering with the whole
US situation. Could you outline the best in worst case
scenarios what would happen if US became debt free? And conversely,
what would happen if the US government went bankrupt? How
did this effict Australia? Thanks, and he's from Wollongong and A.
Speaker 1 (31:31):
That's a great big picture question, Anthony.
Speaker 3 (31:33):
You want to start all right, let's sing about the
US being debt free. The US's debt was worth one
hundred and twenty four percent of GDP last year, one
point twenty four times GDP, so it had US thirty
six trillion dollars in debt and the GDP so that
economic activity of the country was worth US twenty nine trillion.
Speaker 2 (31:51):
That's a lot of debt, James.
Speaker 3 (31:53):
Now that debt would take a lot of repay just
to pay the interest on that debt. Don't even worry
about paying off the debt. Just to pay the interest
on that debt. They're looking at close to a trillion dollars.
Yeah a year now, James. Remember the US budget deficit
is running close to US two trillion dollars a year,
so the debt's actually getting bigger. The interest costs are
going up so unfortunately. As I just I find it
(32:17):
really hard to see how that debt's.
Speaker 2 (32:19):
Going to be paid off in full.
Speaker 3 (32:20):
If it does happen, it's going to take It's hard
to see it happening in our lifetime. It's going to
take a while unless they've got an inheritance from a
richar in Saudi Arabia or something. It's just so hard
to see it paid down via repayments. I mean the
way it could get debt free then via some sort
(32:41):
of restructure where the lenders get wiped out like yacks.
That is, take your cash out and hide it under
the mattress type bad. That is end of day stuff
in terms of financial markets.
Speaker 1 (32:53):
Yeah, I mean, I think the best scenario it ads
is that the government doesn't have to pay down its
debt immediately or even in a hurry, or even entirely.
Like a bit of debt for like any household or business,
a bit of debt is actually a bit useful. Let's
you do things. So the best scenario I think at
the moment would be if the government recognized the problem
(33:14):
and sort of committed to tackling it over the long term.
If it does that, then the people, the bond holders,
the people who lend the US government money every ten minutes,
they would say, look, okay, we get it. You know,
the US is a responsible borrower. They're doing the right thing.
They get the problem, They're going to attack it. That
(33:35):
would be the best situation because the cost of money
would fall. But at the moment we've got the cost
of money rising. It's quite high, and that's because the
bondholders don't believe that the government wants to be responsible.
They're just seeing them spend like a drunken sailor and
cut taxes. So could the US government go bankrupt. It's possible, again,
(33:58):
extraordinarily unlikely. I've seen countries go bankrupt before where they
can't meet their debt repayments, and as Anthony says, that
is just crazy for the bondholders. They would push the
price of money through the roof, and that would come
back to bite Australia because all of our banks, for example,
they have to go into international bond markets to raise money,
(34:20):
and they would need to pay a higher prevailing price
for that money. And guess what, the banks just wouldn't
eat that cost. They would pass it through to borrowers
down here, and so the cost of money would go
up for the entire world. So I mean, that's why
the bond market matters, Anthony. That's why when we hear
these stories about people becoming worried about the American debt situation,
(34:42):
it actually does matter to Australia eventually, and so we
want it to get We want them to get it
sorted out as well.
Speaker 3 (34:48):
Right, absolutely, if the US goes broke, that's like hellscope
times are gazillion.
Speaker 1 (34:55):
Yeah, well said Anthony. Well, Anthony, before we go today,
we wanted to take a moment to pay tribute to
an integral member of the Chanticleer podcast team, and indeed, Anthony,
the leader of the AFRs podcast division, lap Fan, who
is our super producer and the head of podcast here
at the Finn, is very sadly leaving us to start
a new chapter with his beautiful family in Vietnam. Now,
(35:17):
Laps just a brilliant guy. He's calm, he's enthusiastic, he's energetic,
and he's relentlessly positive. He's just a great guy to
work with. But I think it's really important to recognize
the role he's played in building up the Finns podcasts.
From the very first podcast we did, which was an
award winning series called The Sure Thing. Go and check
(35:38):
it out if you haven't listened, Lap's been the champion
of the format inside the finn Now. He's held the
hands of countless reporters like us trying to make the
format work for the first time. He's worked tirelessly with
advertising and marketing and editorial. He's experimented with different formats
and ideas, and he's helped bring tens of thousands of
(35:58):
new listeners and read into the AFAR fold. I think
Anthony being first through the door, being a pioneer of
something is often really hard work and it's sometimes thankless.
But Lap, your contribution to the AFR is mighty, and
the fact that you've done it with a big, passionate
smile on your face is what we'll remember most.
Speaker 2 (36:19):
Here, James.
Speaker 3 (36:19):
I mean the Seant Clear pod. It wouldn't be here,
wouldn't have done as well without Lap. Of all the
things that the financial reviews tried in.
Speaker 2 (36:26):
The past decade.
Speaker 3 (36:27):
I Reckon podcast is right up there in terms of
the success and a lot of that credit has to
go with LAP is endless energy, enthusiasm, ideas and pursuit
of what is a really good form and something that
our readers and our listeners have really responded to. So yeah, On,
behalf of you, James On, behalf of our other super
producer Alex Goer and myself. We'll really miss you, Lap,
(36:49):
and we can't wait to come and record a live
pod in Vietnam on our next world tour.
Speaker 1 (36:54):
Well, we'll see you later, Lap, and we'll see you
all next week. Thanks a lot for listening. If you
like the podcast and you want to hear more, consider
sharing or giving the podcast a review, as it helps
other listeners find us, and don't forget to follow wherever
you get your podcasts. At The Financial Review, we investigate
the big stories about markets, business and power. For more,
(37:17):
go to afar dot com and you can subscribe to
The Financial Review The daily Habit of successful people at
afar dot com slash subscribe. Chanticleer was hosted by me,
James Thompson and Anthony McDonald and it's produced by Alex
Gau and lap Fan. A theme is by Alex Gou,
head of podcast is lap Fan and the head of
premium content is Fiona Buffini. The Australian Financial Review
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