Telstra hangs on the NBN election line

David Thodey delivered the goods for Telstra shareholders this week.

A 9% lift in first-half earnings spurred on by solid growth in Telstra’s mobile business offset the declining revenue from fixed-line and the telco’s media business.

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But with the looming election, a huge unknown hangs over a company that has been one of the great yield plays behind the stockmarket rally of the past eight months. What impact will a Coalition win have on the company’s deal with the NBN and, by association, its dividend policy?

Buried in this week’s half-yearly earnings figures was a $178 million contribution from the NBN; a bulging river of cash that, courtesy of a magnificent deal struck with Communications Minister Stephen Conroy two years ago, has underpinned the company’s commitment to maintaining its dividend flow for the next few years.

The National Broadband Network and the NBN Co itself – with claims of wastage and overspending – has been an easy target for the Coalition. Shadow Communications Minister Malcolm Turnbull has made it clear that fibre to the home will be off the table in the event of a Liberal National win at the polls.

So far, there is no official policy from the Coalition on how any changes in the broadband rollout will affect Telstra. Clearly, though, a new deal will need to be struck and both sides will need to compromise.

Word from within Coalition ranks and Telstra confirm that Thodey and Tony Warren, the Telstra executive who headed the negotiations, have a watertight deal; that they have tied up the government in so much surplus copper wire, it wouldn’t matter which party was in power.

Turnbull, meanwhile, has hinted that all contracts between the NBN and Telstra will be honoured and Telstra shareholders will not be disadvantaged.

Exactly how much the deal is worth to Telstra over the longer term is difficult to fathom. Telstra chairman Catherine Livingstone at the most recent annual meeting declined to put a dollar figure on it, dismissing the $11 billion 2010 net present value figure as irrelevant.

Industry rivals in the meantime claim that, in nominal terms, Telstra could end up with $60 billion over 40 years. Either way, it’s a mighty big number and of paramount importance to the company.

On the surface, that puts pressure on Thodey and Livingstone to accommodate an incoming government in order to maintain the deal that will underwrite the company’s future growth plans.

But it similarly places pressure on the Coalition. A scrapped deal would cause uproar from an electorate that has been promised broadband for more than a decade but has yet to see it materialise. And given Telstra has more retail shareholders than any other Australian company, abandoning the deal would incite a savage political backlash from investors large and small.

The potential for conflict arises from the way in which the NBN compensates Telstra. This involves three elements. The NBN will lease Telstra’s fixed-line infrastructure such as pipes and ducts, providing an ongoing rental income. Similarly, it will lease Telstra’s Inter City Transit Network, which is still under construction, on a 30-year basis.

But the biggest element in the compensation package involves the migration of customers from Telstra to the NBN, and it is this part of the deal that will need to be renegotiated.

Under the terms thrashed out with Conroy, for every private residence or business that disconnects from Telstra’s copper link and switches to the NBN’s new fibre optic link, Telstra will receive a compensation payment.

But the Coalition has made it plain that universal fibre to the home is off the table, meaning that the bulk of homes and businesses will remain connected to copper for the “final mile”. Under a Liberal National government, fibre instead will be extended to “the furthest economically viable point”.

For greenfield estates, that means fibre to the home. It is a similar case for wet areas where copper maintenance costs are high. But for the majority of homes and businesses in urban areas – that is the bulk of connections – fibre will only be extended to the node, those little concrete pillboxes on street corners.

Hence the majority of Telstra customers will remain connected to its copper line and won’t be migrating directly to fibre. That’s where things potentially get tricky.

For its part, the Coalition has promised massive cost savings on the broadband rollout. But insiders claim the savings will be focussed on construction rather than on attempting to squib on the Telstra deal.

It is claimed that 80% of the cost of the current broadband rollout arrangement is in digging up every Australian’s front garden. By limiting the bulk of the rollout to the nodes, broadband will be delivered to most Australians far quicker and at much lower cost. Mind you, the download speeds and the service won’t be as good either.

The Coalition is expected to argue that this will benefit Telstra shareholders because the compensation payments will be delivered far sooner than expected. That improved cash flow will lift the net present value of the deal.

It would be safe to assume that informal discussions between the parties already have taken place in an effort to avert the kind of confrontation that occurred during the Trujillo years, when Telstra’s belligerent attitude to governments of all persuasion resulted in endless broadband delays that eventually cost the company its coveted monopoly.

Thodey and his executive team have proven they can be nimble negotiators. They struck the deal of the century with Labor despite being backed into a corner. Now for round two.

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