Telstra have signed Definitive Agreements with the National Broadband Network Co (NBN Co)  and the Commonwealth for the telco’s participation in the rollout of the National Broadband Network (NBN).

 

The Definitive Agreements, valued at $9 billion, provide for the reuse of suitable Telstra infrastructure and for Telstra to progressively structurally separate by decommissioning its copper network and broadband HFC network capability during the NBN fibre rollout.

 

The Definitive Agreements also include an interim agreement which provides NBN Co with immediate access to Telstra infrastructure – such as pits and pipes – to support the rollout of the second release sites on the mainland

 

Telstra Chairman Catherine Livingstone said the Definitive Agreements needed the approval of a majority of Telstra shareholders with the vote currently scheduled for the company’s Annual General Meeting (AGM) to be held in Sydney on 18 October 2011.

“The signing of these agreements is another important step following two years of complex negotiations between Telstra, NBN Co and the Government,” Ms Livingstone said today.

 

“The Government’s commitment to the NBN and other related policy changes meant that the Telstra Board had to decide whether the company should participate in the NBN rollout or pursue other options.  The decision to participate was made on the basis that the proposed transaction is expected to provide us with the ability to recover more value for the business than the available alternatives, given the loss of value after the NBN policy announcements.

 

“After rigorously assessing the options before it, including the regulatory and commercial implications of each, the Telstra Board expects to recommend that shareholders approve a proposal to participate in the NBN rollout, subject to the conditions precedent being satisfied.”

Telstra is preparing an Explanatory Memorandum (EM) which will outline the basis for the Board’s recommendation to shareholders.

The EM will include an independent expert’s assessment of the proposed transaction in the context of alternative options, and will be provided to shareholders approximately one month before the shareholder vote.

 

The agreements provide Telstra with replacement revenue, through disconnection payments as the rollout of the NBN occurs, and new revenues, through access payments for the use of Telstra’s infrastructure over an assumed average 30 year period. Definitive Agreements and associated Government policy commitments are expected to deliver approximately $11 billion in post-tax net present value over their long-term life. 


Key components of the Definitive Agreements are as follows:

  • Telstra has agreed to disconnect, progressively, copper-based Customer Access Network services and broadband services on its HFC cable network (but not Pay TV services on the HFC) that are provided to premises in the NBN fibre footprint, and will migrate its services onto NBN-based services, over the expected 10 year build period of the NBN;
  • Telstra will provide NBN Co with large scale access to certain infrastructure – dark fibre, exchange space, lead-in-conduits and ducts - at prices based on committed large volume levels of usage and availability.  The term of the infrastructure agreement will be between 35 and 40 years (the precise term depends on a number of factors including NBN Co’s rollout schedule) from commencement, plus two 10 year options to extend exercisable by NBN Co.  The infrastructure will be taken over the course of the NBN rollout and payments made for an assumed average period of 30 years.  In order to maximise the availability of this infrastructure, Telstra will undertake necessary work on the infrastructure.  Telstra retains ownership of all infrastructure assets, except for those lead-in-conduits used by NBN Co which will become NBN Co property once used;
  • The Government has agreed to a package which includes increased funding for the delivery of the Universal Service Obligation (USO), clarification of Telstra’s USO responsibilities for the supply of infrastructure in new developments in the NBN environment, and the avoidance of certain costs to Telstra through various funding measures such as funding of a public information campaign, and for employee retraining; and
  • Telstra and NBN Co have also agreed to key product feature and price commitments relating to NBN Co’s basic voice and data offering.  These will be addressed in NBN Co’s full product terms, which remain subject to further development and industry consultation.

 

Telstra expects to incur the following cash expenditure to support these arrangements over their life:

 

  • approximately $0.9 billion (post-tax NPV) for necessary work on infrastructure and customer migration costs.  These will be offset through savings in legacy network, product and IT investment, therefore enabling them to be covered within Telstra’s existing 14% capex to sales target;
  • approximately $0.6 billion (post-tax NPV) for necessary work on infrastructure and maintenance activities, which are covered within existing operational expenses, as Telstra routinely projects such costs on an ongoing basis;
  • approximately $0.5 billion (post-tax NPV) incremental operational expenses, spread over 10 years, for those customer migration costs and the necessary work on infrastructure which have been brought forward as a consequence of the NBN rollout.  These costs will be absorbed within existing expenditure profiles.