Deals: NBN On The Way?

Telstra, Optus and the federal government have done the long awaited deals to get the NBN going.

But judging by the stockmarket reaction, you would have though Telstra was a loser: the shares were down 2.3%, or 7c, to $2.96 yesterday after detailing its side of the deal in a 33 page release.

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Optus's parent, Singapore Telecom, saw its shares rise 3c, or 1.3%, to $2.38 when it detailed its deal in a one page statement.

But then when you looked at the amounts involved, Telstra's was $11 billion and Optus was $800 million, so the disparity is easy to understand.

But more important was that getting the country's two biggest telcos on board, and willing to migrate their customers (especially the hfc cable of Optus and Telstra, and Telstra's copper wire customers) to the NBN over time, which means the massive project is up and running.

All we now need is for the ACCC to give the OK and for Telstra shareholders to approve the deal, which they undoubtedly will, at the AGM in October.

For Optus the deal won't be a company changer, it doesn't have the legacy fixed line copper wire business and is more about mobile, broadband and wireless.

The big deal is for Telstra and it will be a game changer.

But first a point must be made, of the payments to Telstra $5 billion will flow in over the next 10 years, but a further $5 billion is staggered over 30 years, or to around 2040.

So many of those invested in the company now will be dead before the last dollar is received, and their children could be as old as they are now and their grandchildren a bit younger.

It is truly a long term deal.

For Telstra the front-loaded infrastructure payments will see Telstra's cash flows boosted over the next three-and-half years.

Because its copper network will remain almost entirely intact over that period - the agreement will create incremental income for the company, which opens the way for some capital management, or maintenance of the high 28c a share annual dividend.

But look to 2020 and the changes at Telstra will be very apparent.

It will not be a full service Telco, more a re-seller of fixed-line services paying NBN for access to its infrastructure.

Telstra will still have some of its own fibre and would be paid by NBN Co and other competitors to get access to it in return.

It would be getting the inflation - protected money from the NBN every year and would be selling services and other products to its retail customers and businesses.

The fixed-line business would be smaller and declining, but still generating some cash positive cash flow.

But most importantly, Telstra would be a less capital-intensive business than it is now: it would be far simpler and it would have much lower operating costs.

It would likely still dominate mobile in all forms and have profit margins lower than now, but the lower operating costs will make it very attractive.

Telstra would still have its wireless business (including its wireless broadband business which would be a major player).

Sensis and its half share of Foxtel and services like T-Box and T-hub (or their successors) could still be in the portfolio.

Its mobile business will be 4G or whatever replaces it, meaning high speed data handling and processing will be an everyday event for whatever iteration of a smart phone, Ipad or whatever product will be around in a decade's time.

It would be a very different company to the Telstra we know now, but it would be just as profitable and probably have overseas businesses (in addition to the NZ operations).

And, if there's a change in government at the next election, the agreement says Telstra can receive as much as $500 million in compensation if there is a permanent cessation of roll-out or very slow roll-out occurs. Compensation is not payable if the event occurs before the roll-out has reached 20% of households.

The amount could increase if Telstra believes its commercial interests need to be protected.

More importantly, the company would no longer be an impediment to the development of the best telecommunications infrastructure and ideas in Australia, and could play a leading role, if the management is up to the challenge.

And that will probably be the biggest change. Telstra's management will be different (naturally), more entrepreneurial and able to compete with anyone, instead of rushing to government, the courts or regulators for protection, or resisting change, as it has been doing since privatised back in 1997.

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