Telstra v Feds redux

The battle over broadband is about to begin again.

The opening shots already have been fired in what is shaping up to be a renewed and possibly quite difficult round of hostilities between Telstra (TLS) and the incoming Federal Government.

Telstra boss David Thodey's statement over the weekend that he will accept nothing less than the $11 billion deal negotiated two years ago with the Gillard government was a deliberately intended early shot designed to put pressure on Prime Minister elect Tony Abbott and his incoming communications minister Malcolm Turnbull.

Behind the scenes, however, negotiations have been ongoing for more than a year between Telstra and the Opposition, at times cordial and occasionally frank, over a new NBN deal.

Until now, however, despite the opinion polls pointing to a Coalition victory for the past three years, the negotiations have been based on hypotheticals.

From Telstra's viewpoint, it signed a rock solid agreement with the Federal Government of Australia; an agreement that was reached after long and torrid negotiations that began when the Rudd Government, tired of Telstra's continued attempts to undermine its broadband policy, decided to go it alone, forcing the company into a structural separation.

Rather than cripple the company, as most observers at the time predicted, the NBN deal rejuvenated Telstra, relieving it of the obligation to maintain a century old national network that rapidly was becoming obsolete.

The new fire optic network delivered Telstra vast wealth rather than forcing funding costs on the business, enabling it to focus entirely on its mobile network and retail operations (see Alan Kohler's weekend briefing).

But the incoming government has committed to reducing the cost of the rollout. Rather than a direct home connection, it will connect to the node or possibly even roll the line down suburban streets and make residents pay for the inordinately expensive and time consuming home connection.

Telstra's deal, however, is that it is paid for migrating its fixed line customers over to the NBN. The negotiations will centre over this crucial element. And the carrot the new government will dangle to Telstra is that the cost reductions – and hence lower payments to Telstra – will be more than compensated for by the quicker rollout and therefore increased speed of the cash flow.

The Abbott Government will be keen to push the line that Telstra shareholders will be better off under the new plan, mindful of the fact that the company has the biggest retail shareholder base in the country.

David Thodey has proven himself to be an excellent negotiator, particularly when it comes to dealing with government. And he's wasted no time in ramming home his position. He's prepared to sacrifice nothing.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles