Telstra to gain $8b under coalition plan: analysts

 

‘Less threatening’ plan a boon for telco

Telstra stands to gain $8.2 billion in compensation for selling its copper network to a future coalition-led Federal Government, according to Deutsche Bank analysts.

The telco is set to receive $11 billion in net-profit value from its current deal with the Labor Government and NBN Co, which sees the company continue its universal service obligations while migrating its fixed-line broadband customers to the National Broadband Network.

The deal includes $12 billion in network lease and migration payments, as well as $2 billion in service obligations until 2025, according to Deutsche Bank analysts Andrew Anagnostellis and Vikas Gour.

However, they said the emergence of a "less threatening coalition broadband plan" over recent weeks could also prove a positive for Telstra if the Liberal party moves to a fibre-to-the-node (FTTN) rollout following a potential win at next year's federal election.

Under the opposition's proposed policy — which is yet to be fully detailed — the party plans to phase out the current NBN fibre-to-the-home rollout to 12 million homes, in favour of a more technologically agnostic mix of existing copper and cable networks, with wireless and satellite components where necessary for rural and regional areas.

The coalition would boost speeds in copper areas with a FTTN rollout, which critics have labelled as overly expensive and a stepping stone to a wholly fibre network.

Despite original intentions to "destroy the NBN" after the 2010 election, shadow communications minister Malcolm Turnbull has softening his approach to the Labor project, recently claiming a coalition government would not cancel existing contracts or roll back the current network.

The analysts suggested that even accounting for an expected cost-benefit analysis of the current NBN in the event of a coalition win, a FTTN rollout could begin by the 2015 financial year and be completed within four years.

In that situation, Telstra would continue to receive $2 billion in compensation for ongoing universal service obligations as well as additional compensation for the sale of its copper network underlying the planned FTTN network, and structural separation.

The Deutsche Bank analysis valued Telstra's existing copper assets at $11.4 billion.

"We expect the Coalition to negotiate a new agreement with Telstra, where the company's copper assets are likely to be folded into CAN Co (combined with the fibre network that has been rolled out by 2013) as the FTTN solution is rolled out. As such, CAN Co (owned by the government) is expected to own and operate Telstra's copper network," the analysis notes.

"Whilst Telstra faces the prospect of a structurally separated business with higher levels of regulatory scrutiny and retail competition, we estimate that the net financial impact on Telstra is positive due to compensation payments."

Despite the risks of structural separation and technological risks associated with a fibre-to-the-node rollout, a coalition-led plan to compensate Telstra for its copper network would also allow the telco to continue to own and operate its cable network.

The $8.2 billion compensation estimate is much lower than the $15-20 billion figure communications minister Stephen Conroy has cited as a requirement under such a plan.

Conroy reportedly feared giving Telstra a war chest with which it could directly compete with an FTTN-style network.

Telstra chief executive David Thodey told media and analysts in April that a coalition plan would potentially be "advantageous" to the incumbent telco, enabling Telstra to receive contracted payments quicker and ultimately raise the net-profit value to the company.

"There are some renegotiations in there because it's a different construct and remember there were the ducts going from the street into the house that were paid for, that would stay there [under the coalition's plan]," he said.

The chances of a coalition-led NBN are also rising according to the analysis.

Based on an equal chance of either Labor or the coalition winning the 2013 federal election, the analysts placed a reduced probability on the NBN moving forward as planned without delays, at 23 percent from previous estimates of 27 percent.

The project also had a 23 percent chance of continuing with delays of up to two years, according to the analysis, while the coalition plan had a 30 percent likelihood.

The notion of the NBN being suspended as-is was also marked higher than the project moving forward, at a 25 percent chance.

However, regardless of the eventuating broadband plan — and Telstra's likely compensation — the analysts cast a poor light on Telstra's future share of the broadband market, which they could reduce to 40 percent or less by 2025.

"As Telstra moves away from its current vertically integrated structure, we expect greater competition to erode Telstra's retail market share," the analysts said.

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