yARN: NBN’s failure could smash Telstra shareholders

yARN: NBN’s failure could smash Telstra shareholders

Analysts say Telstra will be hostage to the uncertain world of politics for several years to come

If the National Broadband Network’s rollout is frozen by a change of Government at any time in the next three years Telstra could be hit by a world of hurt, according to analysts.

The revelation comes after Telstra CFO, John Stanhope, said the telco would see very little of the $11 billion promised by the Government and NBN Co in exchange for its cooperation for the first three years of operation.

“In the first three years the cash flow from the NBN are not going to be great,” he said. “The cash flow coming from infrastructure leasing, and so they’re not going to be doing a hell of a lot of work in the first three years.

“And therefore the other element of cash flow that's coming to the company, which is payment for decommission of customers also won't be very much in the next three years.”

Ovum research director, David Kennedy, said the issue was a major conundrum for Telstra. Although the telco giant has more than enough revenue to avoid collapsing, the current deal would give it get billions of dollars from the Government in exchange for decommissioning its ageing copper network – money that could evaporate if the Coalition takes over.

“For a little while after the last elections people went ahead as if that was the end of the NBN question,” he said. “Since then it’s dawned on a lot of people the question is far from settled simply because it’s going to take NBN Co a considerable time to gear up.

“[If Government changed] the decommissioning would not go ahead because NBN Co would not be rolling out its network,” Kennedy added. “No industry likes uncertainty but in this case it can’t be eliminated because the NBN is so politically controversial.”

Unfortunately for Telstra, three years is more than enough time for structural separation to take place – a process that will be incredibly painful if it doesn’t have an $11 billion cushion paid for by the Government.

While the telco would have a large copper network at its disposal, separation and a level playing field enforced by the Australian Competitions and Consumer Commission (ACCC) would kill off much of its competitive advantage and speed up the rapid fall in profits fixed-line networks generate.

IBRS analyst, Guy Cranswick, said the NBN and Telstra deal would always be precarious and that the Coalition would be disinclined to fork out billions to ease the cut.

“A new kind of deal would need to be struck if the NBN fizzled entirely within the next three years,” he said. “For Telstra it could be quite difficult because there are major issues about how they’d move forward.

“It wouldn’t collapse but it would take some tough ratings hits from investment banks.’

But he also said Telstra’s 1.3 million shareholders could save the company from being abandoned by the Coalition thanks to its voting power. Cranswick claimed the potential backlash meant a small form of compensation in exchange for structural separation would be probably provided – albeit an amount far below $11b.

When responding to analyst and journalist questions on this issue, Telstra CEO, David Thodey, would only say that contingencies are in place.

"We have considerations for that and so we will handle it as we come and we've got to balance what we do in the short term, long term and so all that is covered within the negotiation," he said.

Telstra shareholders will be hoping that means the full $11b amount has been locked in to protect against a change in Government - a strong possibility the way things stand today.

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Tags Telstranational broadband networkDavid ThodeyJohn Stanhope

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