Telstra in rather reluctant $11 billion deal with NBN Co

23 June 2011 |

Telstra has agreed signed a Definitive Agreement with NBN Co, agreeing to participate in the roll out of the National Broadband Network to 93% of premises in Australia.

The media reports the deal, which still awaits approval by Telstra’s board, as having a total value of $11 billion. If you do the maths, that’s the sum you’ll reach, although the small print does make it clear that the figures “are approximate values based on Telstra’s best estimate of the likely NPV of long-term agreements”. For a deal of this size, there’s not a lot of joy in Telstra’s announcement. The company clearly has some fatigue after “two years of complex negotiations”.

More than that, this seems to be a decision driven largely by pragmatism. As Telstra states, its decisions were made after weighing up “the available alternatives, given the loss of value after the NBN policy announcements.” And the conclusion was that this route “is superior to the other options realistically available to the company.”

Or maybe they’re just all trying to hide their excitement...

Nevertheless, there are benefits in this arrangement for Telstra. While the top line $11 billion isn’t anywhere near an upfront payment, there is revenue in this for the company, over the next 10 to 20 years, if things go to plan.

Over the next decade, Telstra will receive up to $4 billion in “replacement revenue” for disconnecting copper-based Customer Access Services and broadband services to premises in the NBN fibre footprint. Under the terms of the deal, roll outs to each region will only take place when the NBN fibre footprint reaches at least 90% of the premises in that area. And NBN Co has “absolute discretion” as to when and where it will roll out the NBN, although it will have to supply Telstra with non-binding 12-months and 3-months forecasts. Under the terms of the contract, disconnection must have happened within 18 months of the region being declared ready for service.

However, with no declared timetable for NBN and quite rigorous timetabling requirements upon Telstra, Capacity foresees some rather heated exchanges over the next decade.

Other income for Telstra includes $5 billion in infrastructure payments, for providing NBN co with large-scale access to its infrastructure, specifically dark fibre, exchange space, lead-in-conduits and ducts. This agreement will last for between 35 and 40 years, with options to extend exercisable by NBN Co.

And finally there is $2 billion available from the government, for a 20-year plan to deliver the government’s Universal Service Obligation (USO) reform.

Inevitably, Telstra will incur costs to support these arrangements, which it estimates to be in the region of $2 billion to upgrade its infrastructure and migrate customer.

Capacity has been covering these negotiations for many months now. It has been a difficult process, plagued by criticism from the coalition government that it could all be done more cheaply. Everyone involved must be grateful, or at least relieved, that they have reached a resolution. But in a huge country with a sparse population, the plan to connect 93% of the population was always a huge vision, and an expensive one. We’ll be watching with interest to see where the National Broadband Plan takes us next.