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Telstra's ticking clock

Stephen Bartholomeusz

Published 2:06 PM, 18 Mar 2010 Last update 10:00 AM, 19 Mar 2010


The cone of silence over the progress of the negotiations between Telstra and NBN Co over the price for Telstra’s cooperation with the building of the national broadband network appears to have developed some leaks. It is apparent that while both sides agree on the broad framework for a deal, they are poles apart on price.

That, perhaps, isn’t surprising because in a sense they are negotiating in different dimensions.

Mike Quigley and his advisers at NBN Co are, it appears, taking a pragmatic and hard-nosed view of the strength of their position.

They start from the premise that the NBN is going to be built and will displace Telstra’s fixed line network – which means that network has already been substantially devalued even before the NBN has been built (The rage building over Telstra, March 12; Full coverage: national broadband network) .

From their perspective, the equation is simple. What would it cost to build the network, and what would be its future cash flows, if no agreement is reached and Telstra remains a fixed line competitor in the initial phase of the NBN rollout?

They then look at the other scenario – what would NBN Co save in construction costs, and what would it gain in cash flows, if it bought access to Telstra’s ducts and paid for an agreed and orderly migration of Telstra’s customers across to the NBN as it is rolled out?

The difference in the net present value of the two scenarios is the maximum they should be prepared to pay as compensation/incentives to Telstra. From all accounts, Quigley thinks the number is around $8 billion.

Telstra’s starting point isn’t that much different. It knows that the moment Kevin Rudd and Stephen Conroy announced the NBN would be built, funded by what is essentially a blank cheque from the taxpayers and buttressed by a series of draconian threats to destroy Telstra’s other businesses if it didn’t "voluntarily" cooperate with the destruction of its fixed line business, its fixed line business was devalued.

David Thodey’s team would be looking at their own two scenarios. One would be the present value of the future cash flows from the network if no deal was done with NBN Co and Telstra competed with the NBN until its network was eventually displaced over a decade or more by newer and faster broadband infrastructure.

The other would be the combination of a similar calculation, based on a faster roll-out of the NBN and a quicker erosion of its cash flows if it cooperated, plus the compensation it would receive for that cooperation. Its bottom line is said to be closer to $12 billion than $8 billion.

It is worth remembering that the original, more modest, concept of a fibre-to-the-node network, with a taxpayer commitment of $4.7 billion, was replaced by the $43 billion NBN vision when the government realised that building a new fibre network without Telstra’s cooperation would probably lead to a $20 billion compensation payment to Telstra.

The difference between what NBN Co thinks Telstra’s cooperation is worth today, and Telstra’s assessment of the value of that cooperation to NBN Co, could relate to NBN Co having greater confidence about its ability to attract Telstra customers to its network in the face of competition than Telstra does.

It does, of course, have a lot of financial and political firepower that it can bring to bear and would have even more to throw at Telstra and its customers if there were no "cooperation" payments.

The differing view on value could, however, also relate to the different starting points of the protagonists.

It might be a reasonable conclusion that, from the moment Rudd and Conroy announced the NBN and the associated punitive measures to force Telstra to cooperate, the copper network had been condemned to death, with the only remaining question being how long it would take to die.

It is, however, obvious that Telstra shareholders don’t and won’t accept that immediate destruction of value as the basis of the negotiations. If there is to be a deal they don’t want it to be based on the premise that the fixed network is worth, thanks to government decree, substantially less than it was before the Rudd and Conroy bombshell. They want to salvage some of the sharemarket value lost by that announcement, not confirm it.

With Thodey and his chairman, Catherine Livingstone, having promised that shareholders will get to vote on any deal that is struck with NBN Co, capitalising the new realities into a compensation arrangement would almost guarantee a shareholder revolt and the deal being voted down.

There is, from their perspective, no point in striking a deal with NBN Co that can’t be sold to Telstra shareholders as fair compensation for the progressive displacement of their network and the cash flows it generates. In fact, trying to sell a deal that confirms too big a loss of value would probably cost both of them their jobs.

So, NBN Co is trying to negotiate a deal based on a conviction that Telstra’s copper network has already been massively devalued, while Telstra is trying to negotiate an outcome that salvages some of that value.

The negotiations aren’t helped, and shareholder emotions have been inflamed, by the legislative threats to Telstra’s structure and its wireless and Foxtel businesses that are piling up in parliament.

My colleague, Alan Kohler, earlier this week pointed to yet another complication/threat – Conroy’s commitment to ensuring the expensive universal service obligation that Telstra carries to provide basic access to standard telephony services on equitable terms will remain with Telstra, and will be strengthened, even after the NBN is built.

That raises the prospect that Telstra will at some point in future have a host of unprofitable exchanges that it can’t close even if the NBN is servicing the exchange area. And what about the "last 10 per cent" – the rural and remote communities that won’t ever be connected to fibre because of the prohibitive cost and which, at present, are cross-subsidised by Telstra’s urban cash flows?

NBN Co apparently believes it can be viable with or without Telstra’s cooperation, a conviction based on a business case developed by McKinsey and KPMG after the fact in a study the government appears reluctant to release but which is said to contain some optimistic assessments of the penetration rates for the network, despite the slow take-up by consumers of similar high-speed networks elsewhere.

With up to $43 billion of taxpayer funds to play with, and a government that will do whatever it takes to help it achieve eventually viability, of course, NBN Co can afford to take a long-term view. The more value it can transfer from Telstra’s shareholders to itself, the better, and the earlier its prospects of being viable.

Telstra, however, needs to do a deal that positively impacts its share price today. It is unclear how the impasse can be broken, but it isn’t in the best interests of Telstra, NBN Co or the government for there to be a complete breakdown leading to an all-out war between the government and NBN Co on one side, and Telstra and its 1.4 million shareholders on the other.




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12 Comments


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Noel Peters wrote:

There can be no deal with a government as corrupt and incompetent as this one.

(See Telstra's ticking clock, March 18).

It would be better for Telstra to take its future investment and all operations offshore.

Once set up overseas it would be able to compete on a level playing field in Australia if it desired.

18 Mar 2010 2:34 PM

Graeme Nicholas wrote:

I currently pay $40 per month for Optus cable (4GB+4GB off peak). It is more than adequate for my needs (I use it several hours per day).

At $43bn I can see how the NBN can offer me access at $40 / month and still be profitable.

(See Telstra's ticking clock, March 18).

The most basic question is 'will it be built'?

18 Mar 2010 2:39 PM

Martin DAVIS wrote:

Conroy and Rudd have forgotten one important thing and that is that shareholders also vote. Conroy has destroyed any chance he had of being believable after his interview on ABC's Lateline last night. He reminds me of the old saying -"He couldn't lie straight in bed."

18 Mar 2010 4:02 PM

Jim Browne wrote:

Stephen Bartholomeusz says there are 1.4 million Telstra shareholders.

(See Telstra's ticking clock, March 18). Well in our house one shareholding influences 4 votes and I suspect we are about average. So, Stephen Conroy, that is 5.6 million voters that are pretty angry. That is a bit number of voters to get offside. Seems this issue alone will be the swinger in the next election.

As an Australian first and Telstra shareholder second – I believe in the concept of the NBN and the good it will do for the country, but not at any price.

18 Mar 2010 5:06 PM

Doug Macarthur wrote:

Stonewalling tactics by both sides of this argument will produce nothing of consequence.

(See Telstra's ticking clock, March 18). Both sides have legal obligations in terms of their shareholders/taxpayers. NBN Co should bite the bullet, progressively rollout their own infrastructure over a time period, acceptable to the taxpayer, that's not reliant on old technology, i.e, antiquated ducting pipes, upgraded WW2 PMG exchanges; build underground access hubs, with fibre cable to power poles to households. Big bucks, but it will be worth it in the long-term.

18 Mar 2010 5:17 PM

P. Yeo wrote:

Having had a technology company for the 25 years, I think you are dreaming that the NBN will ever be built.

(See Telstra's ticking clock, March 18).

If the government has nothing to hide why does it not release the KPMG report that the Greens, Liberals requested.

I read a number of websites that clearly do not trust the government to build the NBN and question the costings.

You speak of building the NBN as if it is a forgone conclusion.

I differ and remain unconvinced as it requires much more than simply laying cable.

It requires services and expertise that is in short supply to the government. It requires a business structure to support, develop and market the product.

The resources are limited.

I for one will not pay excessive access fees if I don't need them and further, the last wish I have is for a muddling wasteful government to be the reliable service provider of my internet connection.

I am retired from my business of 25 years now, but I have never had a productive experience with a government body in my life.

Always way too big, bureaucratic, irresponsible, ill informed and a very long list of adjectives in a similar vein.

My hope is that the legislation gets rejected by the Senate.

Further, it was the government that sold Telstra off as a good long term investment. Now the government is applying onerous legislation to Telstra that is destroying shareholder value.

A director of a company would be answerable to the ACCC for such actions.

Because government ministers are exempt from certain such responsibilities, they assume unlimited powers to exercise their will.

I for one will fight against the separation of Telstra under the current government dictatorial legislation. It is the crucial detail that is missing and it is so obvious.

18 Mar 2010 10:17 PM

Glen Davies wrote:

You have forgotten that Telstra could always build it's own NBN. (See Telstra's ticking clock, March 18). It would be completed earlier, cheaper and could bundle packages.

Yes, this may initially destroy some shareholder value, but the upside is that the government NBN will never be completed.

19 Mar 2010 9:07 AM

Tom Knox wrote:

Of course it is in the interests of Telstra shareholders to have – or threaten to have – an all-out war with the government. The government is under time pressure; Telstra isn't.

(See Telstra's ticking clock, March 19.)

19 Mar 2010 12:42 PM

Chris Gilbert wrote:

A reasonable assessment of the protagonists' positions. But you have not factored in two powerful arrows in Telstra's quiver: there are about 1.5 million shareholders who are mainly individuals with political votes.

(See Telstra's ticking clock, March 18).

These shareholders are being privately mustered to not give their vote to the Labor party. Secondly, government debt is already a big burden and finding another $40 billion or even $20 billion will be a big ask.

I'll bet you that NBC will become a white elephant just like the Ord River investment. If the government after next is the Coalition, I bet you they will scrap it. This type of scenario needs to be built into a ten year cash flow scenario.

19 Mar 2010 12:54 PM

Daryl Ereaut wrote:

I believe the federal government – which marketed Telstra as a virtual monopoly – have, since completion of the sale, methodically and intentionally destroyed the very assets of the company.

(See Telstra's ticking clock, March 18).

It encouraged overseas competition, forced Telstra to provide services to these competitors at a price which had no relationship to the value of the infrastructure they intimated when marketing the company.

They have bludgeoned Telstra to force supply of broadband services at a totally unrealistic price to outlaying areas creating a huge expense and therefore loss of income to shareholders.

It now seems that this government, which totally misrepresented the business that they sold to the 'mum and dad investors' of this country, are intent on further destroying shareholder value by holding a gun to the head of Telstra in the form of withholding access to the new mobile spectrum.

In spite of the failure of Telstra to provide acceptable service to their customer network, I see no justification for the government's ongoing tactics to destroy an Australian company for the benefit of overseas operators.

Had these competitors provided a substantially better service maybe there could be some justification.

I have dealt with a number of communications providers and consider their performance abysmal.

How a communications operation can market efficiencies in business solutions and yet fail to answer a service call, blocking a business for anything up to 45 minutes is beyond my comprehension.

I rang a fault through to one company within the last three weeks to arrange a repair to my internet service and the response was: "Sorry our system is down you will have to call back."

This was after waiting on the phone for 30 minutes.

I suggested that as it was their system perhaps they should take a note of the call and put into the system when it was back on line. Obviously they have never heard of a pencil and paper.

If the government is serious, it should set a standard and set fines for breaches of this for all.

19 Mar 2010 2:15 PM

Dylan Walters wrote:

Stephen, in some disputes where the outcome is inevitably bad, it is best to hope for a game changer. (Telstra's ticking clock, March 18) Like the legislation not passing, or a change of government.

1.4 million shareholders saying they will never vote for the government should have some influence on the election.

I am assuming that some Telstra shareholders did vote Labor at the last election.

19 Mar 2010 2:36 PM

Ian Greenham wrote:

The best way forward is to split Telstra into Telstra Retail (TLSR) and Telstra Infrastructure (TLSI) with both companies trading separately on ASX.

As the government builds infrastructure for the NBN it should be paid in TLSI shares.

(See Telstra's ticking clock, March 18).

Thus, TLSI and NBN finish up being the same thing with the government being the majority shareholder.

It is a very bad idea for the government to do anything that seriously reduces the value of Telstra because most Aussies have a vested interest in maintaining the value of Telstra.

Individual shareholders want their shares to maintain their value, but non-shareholders also want to see the value of the Future Fund maintained.

19 Mar 2010 3:42 PM



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