After years of public ramblings and resistance to the thought of restructuring the company, Telstra has finally succumbed to the threats that Canberra had proposed.
Had Telstra (TLS) not voluntarily separated, the penalties imposed included a forced separation by the government as well as not being able to access the up and coming mobile spectrum for 4G mobile services. All these threats would have placed TLS in a severely handicapped position which would have threatened the future of TLS as a viable company.
Whilst not much mention was made in regards to the financial details of the transaction, however this agreement removes the worst case/no deal situation that for a period of time investors were dreading.
The key points to come out of the agreement were as follows:-
- The government will pay TLS $9 billion over time for access to its pits, ducts and existing backhaul cable. This will allow for the rapid deployment of National Broadband Network (NBN) infrastructure and therefore rapid uptake of NBN services by customers.
- The $9 billion also includes payment to offset the time value of migration of TLS customers to NBN and the conversion of TLS’ cable operation to retail only.
- TLS will have access to mobile spectrum for 4G mobile services in the future.
- No comment was made on TLS’ investment in Foxtel or High Fibre Coaxial cable;
- There will be a payments (valued by Telstra at $2 billion) over time that will fund a new company called USO Co. This company will replace TLS’ legislated payments under the Universal Services Obligations. The payment will also cover the retraining of TLS’ staff as they migrate to the new industry structure and the installation of fibre cable in new residential estates.
- Under the Heads of Agreement between TLS and the Government, the total value of the announcement to TLS is $11 billion after tax. It will be paid over a number of years.
How will this affect TLS Shareholders:-
- We have already seen the share price moving beyond the $3.10 mark they have been trading for a while;
- The agreement removes the uncertainty surrounding the value of TLS’ asset in this deal;
- TLS will keep its existing copper network, which over time will depreciate in value;
- The deal is subject to both ACCC and TLS shareholder approval;
- There should not be any impact on earnings for a few years, but as the company changes from being a wholesale wire line telephony company to a full service mobile company providing media content, this will definitely change the makeup of TLS existing revenue.
As yet, the TLS board has not endorsed the deal; they are seeking an independent expert’s report before putting it to the shareholder’s for a final vote. However this Heads of Agreement is seen as a positive first step in the right direction. It certainly does lift some of the uncertainty hanging around TLS for some time now, but there is still a long way to go in finalising this saga.
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