Telstra secures $11b NBN deal

Update Telstra has confirmed it has reached agreement with the federal government to disconnect in stages its copper network and participate in the roll-out of the $36 billion national broadband network (NBN).

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Telstra said the agreement will deliver about $11 billion in replacement revenue, through disconnection payments, and new revenues, through payments for access to its infrastructure.
There will be no upfront payment, but rather payments over many years, it said.

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Optical fibre cables.

Today's deal means the NBN has cleared a key hurdle although the competition regulator and Telstra shareholders are still to give their approval. Two years in the making so far, the NBN plans to connect to 93 per cent of the population by 2018.
Telstra shares gave up early gains to be down 3 cents, or 1 per cent, at $3.00 in recent trading. Locally listed shares of rival Singapore Telecommunications' Optus - which will be paid $800 million for transferring customers to the NBN - were up 1 cent to $2.36.
The pact lifts a key uncertainty that has weighed on Telstra's shares but a short-term rally is unlikely because of challenges in executing the deal and then adapting to the new marketplace, said Angus Gluskie, a portfolio manager at White Funds Management.

Underground work on the NBN in Armidale, New South Wales. Photo: Michele Mossop

"People will view it as a positive that they've got across this final step," Mr Gluskie said. "But it's still an incredibly challenging environment for a telecommunications company to be in."
As part of today's agreement, Telstra will progressively disconnect its copper-based customer network services and broadband services on its hybrid fibre-coaxial (HFC) that are within the NBN roll-out regions.
Its services will be migrated onto the NBN over its expected 10-year construction.
Telstra will also provide NBN Co, the project’s builder, with access to its infrastructure, such as exchange space, conduits and ducts, for a period of between 35 and 40 years.

Shareholder vote
Shareholders will receive an independent expert report from investment firm Grant Samuel and an explanatory memorandum about the deal a month before they vote on whether to accept it. Telstra plans to hold the vote at its annual meeting on October 18.  A majority of shareholders need to approve the deal for it to be accepted.
Telstra has set a deadline of 5pm on December 20, 2011 for a number of conditions to be met for the deal to go ahead. These include shareholder approval, the ACCC accepting Telstra's separation plans and a tax office ruling on how Telstra treats the payment.
The complete deal is rumoured to be 1700 pages long. It contains 10 separate but inter-related documents, including plans for separating Telstra's copper network from the rest of its assets and migrating customers from copper to fibre. It also includes eight definitive agreements.
If the government's broadband policy changes substantially, or a new government cancels the project, Telstra will receive a maximum break-fee of $500 million.  However, this fee is only payable if NBN Co's fibre has reached more than 20 per cent of households as Telstra will still receive cash flows and revenue from the unconnected houses that remain on the copper network.
Chief executive David Thodey said the agreements are not expected to have any material impact on the company’s 2012 financial results, due to the timeframe of the NBN roll-out.
The Optus deal is worth $800 million post-tax to transfer customers from its cable network onto NBN Co's fibre. The migration will start in 2014 and is expected to take four years.
ACCC nod needed
‘‘These agreements represent an important milestone in addressing much of the uncertainty for Telstra associated with the NBN and government regulation and allow us to focus intently on our customer service and simplification strategy,’’ Mr Thodey said in a statement.
The agreement between Telstra and the government remains subject to acceptance by the Australian Competition and Consumer Commission (ACCC) of Telstra’s structural separation and migration plan.
It also requires the approval of Telstra shareholders, who will vote at the company’s annual general meeting on October 18, chairman Catherine Livingstone said.
‘‘After rigorously assessing the options before it, including the regulatory and commercial implications of each, the Telstra board expects to recommend that shareholders approve a proposal to participate in the NBN roll-out, subject to the conditions precedent being satisfied,’’ she said.
Telstra outlined several cash expenditure items it expects to incur over the life of the agreement.
They are approximately $900 million on infrastructure and customer migration costs, which it said would be offset through savings on its legacy network, product and IT investment.
Those savings will mean the expenditure will be covered by Telstra’s existing 14 per cent capital expenditure to sales target, the company said.
About $600 million will be spent on infrastructure and maintenance activities, and a further $500 million in operational expenses, spread over 10 years.
Prime Minister's view
Prime Minister Julia Gillard said a ‘‘big step forward’’ had been achieved in rolling out the national broadband network (NBN).
"The NBN is being delivered - superfast broadband is being rolled out around Australia literally as we speak," Ms Gillard said.
"(With these agreements) we will be able to see the close down of the old copper network and its replacement with fibre-to-the-home and that will deliver super-fast broadband to Australian families and businesses."
Opposition view
The federal opposition said the contracts with Telstra and rival Optus, among other providers, would make it more difficult to deliver its alternative broadband plan.
Broadband spokesman Malcolm Turnbull said today the government shouldn’t be looking to go back to ‘‘ground zero’’.
‘‘The way the government is going about this is very ineffective in the sense that it’s spending taxpayers’ money unwisely,’’ he told ABC Radio.
‘‘What we want to do is get the broadband objective delivered at a lower cost and that would involve at least in part redesigning the network.
‘‘These contracts will make that more difficult but I don’t believe they’ll make it impossible.’’
Mr Turnbull said there was no suggestion anything would be ‘‘destroyed or ripped up or terminated’’ as a result of the deals with Telstra and Optus.
The coalition wants to use mix of technologies to deliver fast but affordable broadband. It insists it’s not cost-effective to ‘‘roll fibre into every single home and apartment in Australia’’.