One of the biggest challenges to the Federal Government's national broadband network (NBN) plan has been overcome with Telstra (ASX:TLS) and NBN Co reaching an agreement on the telco's involvement in the network rollout.
As part of a Financial Heads of Agreement deal, Telstra will migrate its voice and broadband customers to NBN Co, while decommissioning its copper network and cable broadband service.
NBN Co will also gain access to usable Telstra ducts, pits and conduits and a "right to acquire Telstra backhaul services and space in Telstra exchanges". It will also be required to take on the role of wholesale supplier of "last resort for fibre connections in greenfield developments from 1 January 2011".
The Government has also come to the party, agreeing to establish a new company called USO Co to the tune of $50 million in 2012-13 and 2013-14 (and $100 million per year thereafter), which will assume responsibility for Telstra's universal service obligations (USO) for "standard telephone services, payphones and emergency call handling from 1 July, 2012".
It will also provide funding of $100 million to enable the retraining or redeployment of Telstra staff affected by the deal.
In a statement Telstra also said it had been given a written guarantee from Prime Minister Kevin Rudd, that it would be able to bid for "Long Term Evolution (LTE) wireless spectrum should the transaction be completed and that sufficient regulatory certainty will be provided on a range of matters for NBN Co and Telstra to enable the transaction to proceed".
The telco had been threatened with exclusion from future wireless spectrum bids by the Government should it not come to the table with NBN Co and reach an agreement.
In total the deal is expected to provide $11 billion in after tax value to Telstra; $9 billion from the deal with NBN Co and an additional $2 billion from the Government's public policy changes. It will receive payments gradually over the years as the NBN is rolled out.
However, the agreement must still obtain approval from the Australian Competition and Consumer Commission (ACCC), is dependent on enabling legislation and Telstra will need to take it and definitive agreements - to be negotiated over the coming months - to its shareholders for approval. The latter agreements are expected to be taken to shareholders in the first half of 2011.
“We will continue to work with the Government and NBN Co on the detail required to implement the principles agreed today," Telstra CEO, David Thodey, said in a statement. "While today’s agreement is an important step, a very significant amount of work must still be done on many complex issues.”
If ultimately successful the deal means Telstra will most likely become NBN Co's biggest customer.
“This is a sound outcome for NBN Co because when finalised it can maximise the use of existing infrastructure and accelerate the roll out of its network,” NBN Co chief executive, Mike Quigley, said in a statement.
“It also means Telstra is likely to become NBN Co’s largest customer as it progressively migrates its voice and broadband traffic to NBN Co’s wholesale-only, open-access network, providing greater certainty about future revenues.
“This Heads of Agreement represents more than nine months of detailed and complex negotiations and is a foundation for the work on specific binding terms and conditions that lies ahead."
As late as March Telstra told the market it believed there to be a significant gap between Telstra and NBN Co on what each party believed to be an acceptable financial outcome in their negotiations.
The NBN Implementation Study found the NBN could be “implemented within the $43 billion estimate of capital expenditure by deploying fibre to 93 percent, fixed-wireless from the 94th to 97th percentiles and satellite to the final 3 percent of premises” without Telstra's involvment.
However, Communications Minister, Stephen Conroy, has consistently said he wants a deal that involves Telstra as it would result in a cheaper roll out.
In contrast, the Opposition has said it will scrap the NBN should it gain power and has used the Senate Select Committee on the NBN, which it has a majority, to make the same calls.
The Telstra and NBN Co agreement now brings into question the Opposition's intention to cull the infrastructure plan should it win at the next federal election.
Three ISPs have already signed on to provide services in the first stage of the NBN in Tasmania.