IML comments on the recent Telstra announcement regarding the NBN

21 June 2010

In a positive move for the company, Telstra announced on Sunday that it had signed a non-binding Heads of Agreement with NBN Co to participate in the rollout of the National Broadband Network (NBN). 

Telstra’s share price has for been under pressure for some time as regulatory uncertainty associated with the NBN has hung over the Telstra share price. The transaction has been a year in the making and is a positive as it paves the way for certainty over its regulatory position. The transaction also confirms IML’s long held view that the NBN was feasible only with the involvement of Telstra, and that Telstra was well positioned to negotiate a positive outcome for shareholders as far its involvement in the NBN project was concerned. 

The Heads of Agreement is non-binding and conditional, with the transaction subject to formal agreement, ACCC approval, enabling legislation being passed and approval by Telstra’s shareholders. The Heads of Agreement announced on Sunday nevertheless lays out the framework by which the parties will move forward towards transaction closure. 

While only scant financial details have been released so far, Telstra has advised the public that if the deal goes ahead it is likely to deliver a post-tax net present value of $11bn. This equates to a total of 88 cents per share. The $11 billion delivered to Telstra comprises the following payments:

1. $9 billion in respect of the migration of customers from Telstra's networks, the decommissioning of Telstra’s copper network and cable broadband service and for the use of Telstra’s infrastructure; and

2. $2 billion for the transfer to the Government of the costs associated with supporting remote and regional areas under the Universal Services Obligation.

The payments are to be made progressively as the networks are decommissioned, NBN is rolled out and customers are migrated. The $11 billion figure is at the upper end of the $8-12 billion valuation that many analysts in the market had been anticipating for the transaction, and importantly, is made up of cash rather than equity of an uncertain value in NBN Co. The deal also means that Telstra will be able to save on expenditures that otherwise would have been made on maintaining and expanding its own networks, including the approximate $300 million upgrade that was proposed for the Sydney and Brisbane networks. The deal allows Telstra to maintain its 50% stake in Foxtel and to bid for 4G mobile spectrum when it becomes available.

Telstra expects the deal to be completed in the first half of calendar 2011. While the stock price has so far reacted positively to the news, we continue to maintain an overweight holding in Telstra, with our view underpinned by the company's continued strong cashflows, significant scale, large customer base and solid balance sheet.