Telstra has been very careful not to compare its $11 billion deal with NBN Co and the federal government to the status quo before Stephen Conroy coerced it into agreeing to a staged exit from its traditional copper-based fixed line business.
In one sense that comparison would be pointless given that, having agreed to terms and with NBN Co now rolling out its fibre network, the old status quo is already history that can’t be revisited.
There is a suspicion, however, that the main reason David Thodey, Catherine Livingstone and their team have studiously avoided the comparison is that they don’t want to inflame political sensitivities by bragging about just how good a deal they’ve struck at the taxpayer’s expense.
Outgoing Telstra chief financial officer and the man who oversaw the negotiations, John Stanhope, however, when asked directly in his KGB interview whether the deal would have been a good one regardless of the threats that forced Telstra to the negotiating table, didn’t hesitate.
"I think it’s a good deal anyway," he said, although he did go on to refer to the "nasty things" that could have happened to Telstra had it resisted Conroy.
Under the deal Telstra will receive three streams of value. It will get about $5 billion in net present value terms for providing NBN Co access to its infrastructure; $4 billion for disconnections as it moves its customers across to the NBN and $2 billion from the government for a range of payments and savings.
While Telstra and NBN Co and the government have assessed the NPV of the deals at $11 billion, it is worth noting that Telstra’s independent expert, Grant Samuel, used a lower discount rate to assess their NPV at $12.8 billion. In nominal dollars the payments, which will flow over decades, will amount to tens of billions of dollars.
In effect, Telstra is being paid to manage a staged exit from an ageing, expensive-to-maintain piece of infrastructure and in the process, as Stanhope said, progressively remove itself from the net of intrusive regulation that has been built around that network since the industry was opened to competition.
With the Australian Competition and Consumer Commission inexorably lowering access prices, and the Telstra customer base on that network shrinking in the face of competition and growth in wireless-only households, ridding itself of the copper network and the regulator over time should be extremely positive for Telstra and its shareholders in the future.
The 'downside' is that Telstra will have to compete with the rest of the sector on the NBN’s levelled playing field. Stanhope, however, has an interesting perspective on the decommissioning payments, which he said could be regarded as compensation for the effective structural separation of Telstra’s copper network from its other activities or as compensation for the possible loss of market share that may occur within a more competitive environment.
The Rudd government opted for the NBN when it discovered, during its investigation of an earlier fibre-to-the-node network, that it would have to pay Telstra compensation estimated at about $20 billion for cutting through its copper network. It would appear that not only will Telstra be fully compensated for gradually decommissioning its network, but it has negotiated a deal that protects it from the effects of competition on its market share.
From a position of apparent weakness and vulnerability, given the 'leverage' Conroy brought to bear on the negotiations, Telstra may well have completely out-negotiated the government and NBN Co, exploiting the government’s determination/desperation to realise its broadband vision.
The massive steady cash flows that it would receive over the next several decades, the regulatory certainty and the simplicity of focus it would bring to Telstra’s business explain why Telstra’s preference is that the NBN should be fully rolled out rather than aborted if the Coalition wins the next election. Even if that happens, Stanhope made the point that legislation the effect a halting of the rollout would have to get through both houses of Parliament, which wouldn’t be straightforward.
Telstra does have downside protection, just in case. Much of the $11 billion (or $12.8 billion) of NPV flows to Telstra quite early from the payments NBN Co will make for leasing Telstra’s infrastructure. By 2014 it would also be receiving quite significant sums as disconnection payments, as well as direct payments from the government for providing the universal service obligation.
By the time the roll-out was halted by the Coalition, it may well have received or locked in as much as a quarter of the value of the deal it struck with NBN Co and the government.
By then NBN Co would be lucky to have connected 10 or 12 per cent of premises to its network, so Telstra would still have a largely intact copper network while receiving disproportionately large compensation for the loss of the wholesale margin (and perhaps some share loss) from a fraction of the network. And it could then enter another round of negotiations with the new government over compensation for its version of structural separation.
That’s why Grant Samuel concluded that the best outcome for Telstra shareholders, if it were looked at simply in NPV terms (which ignores the harder to measure benefits of getting the ACCC out of its affairs and the creation of a far simpler business model) the best-case outcome for Telstra would be for Telstra to do the deal and then have the roll-out subsequently terminated by a new government.
In any event, it is easy to see why Stanhope believes, whatever happens and regardless of the threatening backdrop to the negotiations, Telstra has struck a good deal for its shareholders.
Stanhope has been with Telstra for more than four decades. As his retirement on December 30 looms, he would be satisfied that his last major contribution to the group, spear-heading the negotiations over the NBN, is likely to be both the biggest and most lasting achievement of a lengthy and very successful career.