Wednesday, 24 April 2013

NBN: Why Telstra should want to sell, not lease, its copper to NBN Co.

The Coalition acknowledges it has to strike a deal with Telstra and leave their 1.4M retail shareholders "no worse off", or even with "a mild positive".  We know from the 2011 Explanatory Memoranda to shareholders that the disconnection fee was worth $4 billion to Telstra in Post-Tax 2010 Net Present Value terms and that last Friday NBN Co put a 2021 figure of $11.3 billion on "FTTP Access", presumably mostly the Telstra disconnection fees + lead-ins.

The Coalition has to meet or beat this figure and tell us if it is CapEx, a one-time payment per line, or an OpEx, small payments spread over many years costing a lot more in total.

What the Coalition hasn't said clearly is how they intend to execute the deal, presumably meaning its Not Good News for their plan:
All CapEx, all OpEx or a combination?
Why this matters:
  • Telstra won't settle for a worse deal, they are known for driving hard bargains, and
  • the $20.5 billion of the Coalition Plan doesn't appear to allow for $8-$11 billion in CapEx to buy Telstra's copper.
    • Or there's at least an additional $1.7 billion in OpEx, more than half the current $3.1 billion in the Coalition Plan.
The Coalition, as Abbot, Turnbull and others, have implied it's a CapEx deal by saying 'Telstra get their money sooner, that's a benefit to them', but that's not clear policy.

The FTTN proposal is for 72% copper services with 28% FTTP covered under the original Structural Separation Agreement. A new agreement must beat a hurdle of 72% of $4 billion NPV or $2880M.

The crunch is:
What happens when a copper service that's been leased by NBN Co gets replaced with a Fibre service. Does the existing disconnection payment kick-in, in full or pro-rata'd up until a minimum lease period?
An optimistic (30% EBITDA margin) calculation of 8.9M lines leased under the ACCC approved Unconditioned Local Loop Service (ULLS) at $16/mth, has a 10-year NPV of $2.3 billion and $2.85 billion at 15 years, with $3.1 billion at 20 years, or 2032, suggesting that the minimum lease period is 20 years.

What's unknown is Telstra's EBITDA margin for ULLS. Trujillo in 2005 (pg 13) gave a figure of 27% for all new services. The 2012 Telstra Annual Report (pg 36) gives EBITDA margins of 60% for retail PSTN and 37% for retail fixed broadband and 40.5% for the whole company, in-line with Trujillo's 44%.

The Telstra EBITDA margin for wholesale ULLS might well be 18-25%,  not the 30% used, making the deal unacceptable to them.

The Coalition could instruct NBN Co to offer Telstra a higher rate than the ULLS $16/line/month, but the ACCC would have to agree, which would burn time and cause grief.

The beauty for Telstra of a sale, as in transfer of ownership or sole rights to use of the copper asset, is twofold:
  • remediation and maintenance are no longer their problem, and
  • they get all their cash by 2019
    • much better than having ULLS payments dribble in over 20-25 years with uncertainty from Policy changes or wrangling over conversions to Fibre.
Because the Coalition has deliberately obfuscated this issue, their proposal must be weak in this area.

My interpretation is they've traded $8 billion in CapEx for $30-$50 billion in OpEx to make their plan more appealing at $20.5 billion, not $28.5 billion at least.

Quotes and Sources

Coalition Policy Document
NBN Co and Telstra
We may seek to negotiate variations to commitments to provide efficiencies, allow the NBN to be more quickly deployed or otherwise create benefit.

NBN Co will seek permanent access to Telstra’s copper between premises and concentration points such as pillars, cabinets or exchanges. Telstra has publicly stated the copper has minimal economic value, leading us to anticipate cost-effective access will be attainable.

ABC Inside Business. Turnbull doesn't clarify the "rent or buy" question when its asked.
ALAN KOHLER: So the other thing that strikes me about your scheme is that you need access to the copper, right? You need to either own it or rent it or something from Telstra. Now you announced the policy; you'll go to the election with that policy, but without having done a deal with Telstra. So you're a bit hanging out to dry, aren't you? I mean, they've got you over a barrel.

MALCOLM TURNBULL: Well I've done a lot of deals with Telstra over the years and they know me very well; I know them very well.

ALAN KOHLER: Well you'd know how hard they can play it.

MALCOLM TURNBULL: I do. I do. And I know that it is in their best interest to support the approach we're taking. You can see that the market has welcomed the approach we're taking. They've treated it - as I've said for some time, our approach is somewhere between neutral and a mild positive for Telstra shareholders. Uncertainty, disagreement, tension with government has never been good for Telstra shareholders.

I am very confident that we'll achieve speedily the slight rearrangement to the agreements that we're talking about.

AFR reporting on ratings agency Fitch warning of a downgrade to Telstra shares:
due to a technicality that could threaten billions of dollars in disconnection payments.
AFR reporting Telstra "keeps NBN Cash". Abbot is specific "start to get some money" sooner. Goes either way, but leans to "rent".
Mr Abbott said: “Telstra only gets paid under the government’s scheme when the NBN connection becomes live and there are very few live NBN connections right now. Under us, the thing will become operational vastly more quickly, so Telstra will start to get some money.”
An AFR opinion, not source, says Telstra shareholders will benefit:
Having the network rolled out faster is important because it means the payments to Telstra for the switchover of customers from the old copper wire network to the NBN will be paid quicker.

An ABC interview with Turnbull. Does the singular "payment", not "payments", imply "buy"?

There’s an assumption that you make that you can get at no charge access to Telstra’s copper connection to the home. It took years for the Labor Party to negotiate access to that under their plan. Why do you assume and isn’t it a fatal flaw to your assumptions that you’ll get access easily and without cost?


Well, obviously I’m not uninformed or inexperienced in dealing with Telstra. I’ve had a lot of dealings with Telstra over the years.


That doesn’t mean they’ll dance to your tune.


No, no doesn’t mean you’ll let me finish a sentence either but what it does mean is that they are getting paid under the existing contracts which we will honour, $1500 per premise as it is connected to the NBN Co and whereupon they switch their copper network off, so that it is of no value at all. Under our approach because premises will get connected to the NBN sooner – that’s to say, more quickly, Telstra would get paid more quickly. So it is in their interests, because they would get their payment – it wouldn’t get any more than they’re contracted for but they would get them sooner – it is in Telstra’s interests to go along with the proposal we’ve made which is why all of the stockbroking firms have said, and I think it’s a fair comment, that our approach is a mild, not a big positive, but it is certainly a mild positive for Telstra. So Telstra shareholders are no worse off and they might be a little bit better off and that is why Telstra has an interest in going along with that.

So this is actually very well thought out as opposed to some of the loopy, uninformed, reckless comments that you’ve seen from people like that gentleman Mark Gregory at the RMIT who not so long ago was saying Julia Gillard should get the army to build the NBN, and yet he’s apparently treated as a serious commentator in this field.

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