Telstra's untouchable NBN billions

The closer to the federal election it gets the more volatile Telstra's share price is likely to be as investors factor in the uncertainty created by the prospect of a Coalition victory and its implications for Telstra's national broadband network deal. In reality, they shouldn't be overly concerned.

When, earlier this week, David Thodey ruled out renegotiating the $11 billion deal, in net present value terms, that Telstra struck with the government and NBN Co nearly two years ago he wasn't saying anything new.

From the moment the ink was dry on those contracts Telstra has made it clear that the $11 billion of value would be its bottom line in any new negotiations in the event of a change of government and NBN policy. What it hasn't ever done, however, is rule out new negotiations.

Malcolm Turnbull is well aware that Thodey and his chairman Catherine Livingstone aren't going to budge on their bottom line that their shareholders have to receive at least $11 billion of net present value, in June 2010 dollars, from cooperating with whatever form of NBN is ultimately rolled out.

Their stance, however, is not necessarily irreconcilable with his plans or his ambition of halting the rollout of Labor's fibre-to-the-premises network and instead building a far cheaper fibre-to-the-node network.

Telstra won't budge on value but it is open on the question of what kind of network should be built. That's a matter for the government of the day, not Telstra.

It needs to be remembered that the current deal, with its estimated net present value of $11 billion, doesn't involve a simple lump sum payment but rather a number of revenue streams payable over the next several decades.

Of the $11 billion, about $5 billion is for access to Telstra's infrastructure, $4 billion is for the progressive disconnection of copper lines and $2 billion of payments and savings would flow from a separate arrangement with the government for providing essential services and for the re-training of Telstra employees and other bits and pieces.

Telstra would also receive $500 million of compensation if the rollout were permanently halted after it had reached 20 per cent of premises. But with the rollout already falling well behind the original schedule there is no prospect of that occurring before the Coalition would freeze the rollout, assuming it did win the election.

Equally, because the rollout would be stopped well short of the decade it was supposed to take and because it is behind schedule Telstra would only receive a proportion of the access and disconnection payments – probably 30 to 40 per cent at best of the access payments ($1.5 billion to $2 billion) and perhaps 10 per cent ($400 million) of the disconnection payments.

Thodey and his former chief financial officer, John Stanhope, made it very clear at the time the original deal was struck that Telstra has a natural hedge against a change of government and a change of NBN policy. If the rollout were simply halted, for instance, Telstra would still continue to collect all the cash flows from the overwhelming majority of its copper lines that would still be intact.

In that sense Telstra is protected if the rollout is frozen while the Coalition conducts a review of its options and of their costs and benefits and then attempts to strike a new deal with Telstra.

Under Turnbull's plan, of course, while the NBN would run fibre to Telstra's existing nodes, it would use the existing copper connections from the nodes to premises – the most costly part of the existing NBN build. He's well aware that he would have to renegotiate a deal with Telstra that delivers, at least, equivalent value to the $11 billion it is contracted to receive.

As a former high-flying investment banker, of course, Turnbull is also very familiar with the nature of the discounted cash flows calculation used to estimate the net present value of future cash flows and the reality that a dollar today is far more valuable than a dollar in five years' time, or 25 years' time. He doesn't have to deliver the same amount of nominal dollars to Telstra to deliver the same amount of real value.

A fibre-to-the-node network would not only be much cheaper to build (albeit allowing significantly lower speeds than fibre-to-the-premises) but much quicker to build without the connections to individual premises.

That means more customers switching over to his version of the NBN much earlier than they would in a FTTP rollout – which means Telstra would receive payment for handing those customers over to NBN Co much earlier.

Bringing forward the payments would mean that while Telstra might receive fewer absolute dollars from NBN Co over the next couple of decades it could receive as much, if not more, in net present value terms as it would under the current deal.

There is, therefore, a sound basis for a renegotiation of the deal in the event of a Coalition victory.

One suspects that, given it has its starting position in any negotiations with Turnbull locked in, Thodey and Livingstone will be reluctant to go back to shareholders with a new deal unless there is, in net present value terms, an even better deal on the table.

They would be acutely aware that a change of government would bring with it the opportunity to have a second bite at the NBN cherry. With the $11 billion of net present value as a non-negotiable starting point, there's only upside for Telstra shareholders in that prospect.