Telstra struggles to meet NBN timetable

TELSTRA is at risk of missing a mid-year deadline to present shareholders with a vote on a multibillion-dollar deal with NBN Co because of complexity and slow bureaucratic processes, according to analysts at Goldman Sachs.

By InvestSMART · 26 Jan 2011

By InvestSMART ·
26 Jan 2011

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Shareholders have been promised a vote on Telstra's proposed deal with government-owned NBN Co, which is building an underground optical-fibre network to replace existing copper telephone lines.

The deal will see Telstra lose its monopoly on Australia's fixed telephone lines in exchange for compensation of $11 billion and future contracts with NBN Co.

"In our view, the June deadline is extremely optimistic and the risk of delay is high," Goldman Sachs analyst Christian Guerra wrote in an industry strategy outlook for 2011, released yesterday.

"The Australian Competition and Consumer Commission has three tasks to complete in order for the NBN to proceed . . . We believe it is unlikely that the ACCC will be able to approve or reject these undertakings by mid-2011."

The delay adds to uncertainty about Telstra's future earnings.

The ACCC is working on a fixed-line pricing review that is crucial to Telstra completing its agreement with NBN Co. Once the deal is finalised, the ACCC must also approve a structural-separation undertaking and migration plan, and a special-access undertaking from NBN Co.

ACCC commissioner Ed Willett says the regulator cannot speed up approval because of the project's complexity, but NBN Co's undertaking can be completed separately from the Telstra deal.

"We will do what we can, but it's an important process and we need to take the time we need to take," he told BusinessDay.

"When we have [Telstra's] application [to separate], we will take account of all the time-frame factors. The structural-separation undertaking and the migration plan can be done in one process, and the special-access undertaking can be done in a different time frame."

The Goldman Sachs report also predicts that take-up of wireless services will be the telco industry's biggest growth area, along with tablet devices and machine-to-machine communication.

The report reduced the target price for Telstra to $3.10, down from $3.55. Yesterday Telstra shares closed at $2.82, up 2?.

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Frequently Asked Questions about this Article…

What is the proposed Telstra–NBN Co deal and how would it affect Telstra's fixed-line business?

Under the proposed deal Telstra would lose its monopoly on Australia’s fixed telephone lines as NBN Co builds an underground optical-fibre network to replace copper lines. In return Telstra would receive about $11 billion in compensation and the prospect of future contracts with NBN Co.

Why is Telstra at risk of missing the mid-year shareholder vote on the NBN deal?

Analysts at Goldman Sachs say the June/mid-2011 deadline is optimistic and the risk of delay is high because the deal is complex and slowed by bureaucratic processes, including required regulatory approvals.

What regulatory approvals does the ACCC need to complete before the NBN and Telstra deal can proceed?

The Australian Competition and Consumer Commission (ACCC) needs to complete a fixed-line pricing review, approve Telstra’s structural-separation undertaking and migration plan, and consider a special-access undertaking from NBN Co — all of which are crucial to finalising the agreement.

Can the ACCC speed up its approval process for the Telstra–NBN arrangements?

No. ACCC commissioner Ed Willett said the regulator cannot speed up approval because the project is complex. However, he noted NBN Co’s special-access undertaking could be completed separately from the Telstra separation process.

How might delays in regulatory approval affect Telstra’s earnings and investor outlook?

The article says delays add uncertainty to Telstra’s future earnings. Reflecting that risk, Goldman Sachs lowered its Telstra target price to $3.10 (from $3.55). For context, Telstra shares closed at $2.82 on the day referenced.

What did Goldman Sachs say about growth opportunities in the telco industry?

Goldman Sachs predicted the biggest growth areas for the telco industry will be take-up of wireless services, increased use of tablet devices, and machine-to-machine communication.

What specific ACCC tasks are most critical for Telstra to complete its agreement with NBN Co?

The fixed-line pricing review is cited as crucial to Telstra completing its agreement, and after the deal is finalised the ACCC must also approve the structural-separation undertaking and migration plan as well as NBN Co’s special-access undertaking.

As an everyday investor, what should I watch for next regarding the Telstra–NBN deal?

Watch for ACCC decisions on the fixed-line pricing review, structural-separation and migration approvals, and timing of Telstra’s shareholder vote. Also monitor analyst updates (such as target-price changes) and any commentary on industry growth drivers like wireless services and tablets.