Newspaper headlines in Australia proclaimed on Sunday that Telstra had signed a deal with NBN Co to transfer customers from its copper network onto the National Broadband Network’s fibre network and share Telstra’s infrastructure. Not surprisingly, a press release from Telstra was a little more muted stating it had signed a non-binding Financial Heads of Agreement to participate in the rollout of the National Broadband Network (NBN).
The government had been seeking a commercial arrangement with Telstra to avoid the need for a duplication of infrastructure for the national rollout of its $43 billion broadband network. Under the deal, NBN Co will have access to Telstraâ€™s network of pits, ducts and wires.
The transaction, if completed, will deliver to Telstra a post-tax net present value of approximately AU$11 billion (US$9.5B). This includes payment for the decommissioning of Telstraâ€™s copper network and cable broadband service, use of Telstraâ€™s infrastructure, and the value to Telstra of avoiding costs, including certain Universal Service Obligation (USO) costs. Payments would be made progressively to Telstra.
Telstra Chief Executive Officer David Thodey said: â€œWe will continue to work with the Government and NBN Co on the detail required to implement the principles agreed today. While todayâ€™s agreement is an important step, a very significant amount of work must still be done on many complex issues.â€
These issues are as diverse as migration processes, taxation, the future of legacy regulations applying to Telstra and the consequences of any major changes to the NBN rollout schedule.
While the Government is not a party to the Heads of Agreement, Telstra has received written confirmation from the Prime Minister that Telstra would be able to bid for Long Term Evolution (LTE) wireless spectrum should the transaction be completed and that sufficient regulatory certainty will be provided on a range of matters for NBN Co and Telstra to enable the transaction to proceed.
In addition to requiring shareholder approval, the Heads of Agreement has a range of conditions, including the passage of necessary enabling legislation and Australian Competition and Consumer Commission (ACCC) approval. Accordingly, there can be no guarantee at this time that the transaction will progress to completion.
The Heads of Agreement provides the framework for definitive agreements to be negotiated over the coming months. Should those agreements be finalized Telstra expects they would be put to shareholders in the first half of calendar 2011. Shareholders and investors would receive comprehensive detail in relation to the definitive agreements and an independent expertâ€™s report on the transaction well before the shareholder vote.
No doubt, there will be much discussion, particularly from institutional investors seeking to protect the value of their investment in Telstra but the way this deal is structured there does not appear to be a clear structural separation of the company into wholesales and retail arms. However, it will see the carrier decommission both copper & HFC telephone and broadband services over time which achieves almost the same result.
Other countries hoping to roll out NBNs and facing similar issues with incumbent operators will, no doubt, be watching how the Australian situation pans out.