Telstra signs new NBN deal

After a year of negotiations – six months more than originally envisaged – Telstra has signed a series of new agreements with the Government and NBN Co, to adapt their 2011 deal to account for the new 'multi-technology mix' national broadband network. Under the original deal, Telstra's copper and cable would have become redundant as the national broadband network was rolled out, so Telstra just agreed not to use it and was left to decommission it. Under the new deal, though, the national broadband network will make use of the copper and cable, so Telstra will actually transfer ownership to NBN. As a result it has been given additional protections, in case NBN Co sold the assets or the roll out ceased.

All parties have signed up to a key part of the negotiations, which is that the 'value' to Telstra is unchanged from the $11bn granted under the original deal. That $11bn is calculated using a 2010 discount rate, as per the original agreement, and that's fair enough. Interest rates have since fallen, so the value of the deal has risen, but it's the value of the original deal as at the date it was signed that needs to be preserved. It looks like it has been, with the payment schedule – based on the roll out of the NBN and the disconnection of premises by Telstra – broadly preserved. Since it considers that the value of the original deal has been preserved, Telstra has decided not to put the new deal to a shareholder vote.

A similar agreement has been signed with Optus, preserving the value of its original $800m deal. NBN Co will also be putting various contracts to tender, for the maintenance and operation of the copper and cable networks, and Telstra, as the long-term former owner of these networks, will be better placed than anyone to make a profit from such contracts.

As we wrote in Telstra climbs the food chain on 29 Jul 14 (Hold – $5.74), though, mobile is where it's at for Telstra and growth will be hard to come by. As a result, the forecast price-earnings ratio of 17 for the current year looks pretty steep. The stock is up 6% since Telstra buyback tax risk on 17 Sep 14 (Hold – $5.40) and we remain closer to downgrading than to upgrading. HOLD.