Telstra seals $11 billion NBN deal

news Telstra announced yesterday that it had finalised its Definitive Agreements with the National Broadband Network Company and the Commonwealth Government for Telstra’s participation in the rollout of the NBN. The agreements and associated Government policy commitments are slated to provide Telstra $11 billion in post-tax net present value over the long-term life of the agreements.

The finalisation of the agreements comes eight months after the deal was originally inked. At the time, approval of Telstra’s structural separation undertaking and customer migration plan were pending approval by the competition regulator. The $11 billion value of the deal has been scheduled to be paid out in amounts over “many years”.

“As was detailed in the Explanatory Memorandum, compared with other realistically available options, this outcome should deliver a better overall financial outcome, a more stable regulatory environment and greater strategic flexibility, enabling Telstra to maintain a strong focus on our key areas of growth,” Telstra chief executive David Thodey said.

In a statement, Stephen Conroy, Communications Minister, called the move a key milestone and a major step forward for the Gillard Government in delivering the NBN and providing all Australians access to infrastructure that will increase future prosperity. Conroy said that the Definitive Agreements show the way for the NBN to be built more efficiently, with quicker take-up, higher revenues, lower and more reliable costs, and less use of overhead cabling. This will involve reusing existing infrastructure, preventing duplication of infrastructure and causing less disruption in communities.

According to Thoday, the agreements will also contribute to free cashflow generated in the medium term, provide Telstra with greater financial flexibility and a more robust balance sheet, and help to offset the decline in free cashflow expected as customers migrate to the NBN.

Telstra noted the Commonwealth’s $190 million post-tax net present value commitment to Telstra under the Information Campaign and Migration Deed – one of the Definitive Agreements. A cash payment is expected in 2012 and will be amortised over three years as Other income as costs build up. This payment is outside Telstra’s guidance for fiscal year 2012.

The Agreements are expected to change the competitive dynamics of the Australian telecommunications sector. Telstra’s migration to the wholesale-only NBN and decommissioning of its copper network will enable full structural separation. Telstra’s Structural Separation Undertaking (SSU), recently accepted by the Australian Competition and Consumer Commission (ACCC), has come into force with the finalisation of the Definitive Agreements. Thodey said that the Minister had made decisions that allowed Telstra to maintain “ownership of our HFC network and our share in FOXTEL”, which along with the ACCC approval of the final Migration Plan, were pre-conditions to the SSU coming into force.

The finalisation of the agreements comes at the end of almost three years of intense and complicated negotiations with numerous parties. Thodey expressed satisfaction at the positive outcome for customers, shareholders and employees. He felt that the improving customer service and strong overall value proposition would help Telstra retain and win customers as the industry transitions to the NBN. The Government has committed to various regulatory and other matters in support of the NBN and Definitive Agreements. These commitments include:

• New universal service arrangements that will begin on 1 July 2012 to ensure reasonable access for all Australians to a standard telephone service and payphones, and ongoing delivery of the emergency call service by Telstra and of the National Relay service. These arrangements will also ensure appropriate safety net arrangements while migrating voice-only customers to an NBN fibre service and develop technological solutions to support continuity of other public interest services.
• A $100 million retraining agreement that provides Telstra funding to help in retraining and redeployment of Telstra staff affected by these major reforms.
• Payment of the cash components of the Financial Heads of Agreement, valued at $190 million post-tax NPV. This is part of the originally agreed value of roughly $11 billion and does not constitute an additional payment.
• No requirement for Telstra to provide undertakings about its control of hybrid fibre coaxial (HFC) networks and subscription television broadcasting licenses. This implies that Telstra will not be stopped from competing for spectrum released as part of the digital dividend following the shutdown of analogue TV broadcasting.
• A plan to advise customers of their options, with the start of the volume rollout and ACCC endorsement of the Migration Plan. NBN Co will team up with industry to educate the public in a campaign to inform customers about the ongoing migration of service from copper-based infrastructure to the fibre optic infrastructure.

opinion/analysis
A historic day for Australia’s telecommunications sector. While it arrived yesterday with a whimper and not a bang, I suspect that we will look back at this one as a landmark.

Image credit: Telstra. Opinion/analysis by Renai LeMay.