I nearly started a new thread for this, because both of these companies are now completely news one’s going forward.
I’m guessing the TEL code won’t even exist next year post separation of Chorus, and new branding of Retail. And Telstra has gone down the other track, and will compete with the NBN.
In summary:
Telecom v Fibre = Telecom will build Fibre network, through Chorus which will be split off. This is a "co-op" agreement.
Telstra v Fibre = Telstra will not build Fibre, and let the NBN do it alone. This is a "compete" agreement.
Telstra has quoted an 11b NPV from this! And after scanning the agreements I’m not doubting it. I see no areas of risk to TLS holders! With considerable upside.
Telstra will receive payments from the NBN as customers migrate off to Fibre, + receive payments for access to its ducts. Pay TV over Fibre will stay protected.
The agreement has some very strong risk mitigation clauses for shareholders. The key one being what happens if NBN is slow to deploy or doesn’t even deploy. In the case where NBN falls over, they will pay Telstra $500m, where it is slow to deploy there is a natural hedge as customers will keep buying from Telstra wholesale on the copper network.
So overall – Telstra is winning so far.
Cash flows and timing:
The 11b NPV states significant capex of around $2b, this is massive, but its what Telstra deploys in a normal year! They have been spending capex on copper transition for quite some time, hence this capex was going to happen anyway. The only incremental capex is about $500m, yet only need to happen as the rollout happens.
This is very important, as Telstra in the short term will be no worse off, yet will have this $11b of value flow through for quite some time.
What Telstra can do in the short term is seriously reduce cost and complexity. They will still have a wholesale BU untill copper has gone, but it will not operate under a very known and restricted model. On the retail side of things, Telstra can now apply more focus to its already successful net gen business model.
Telstra has not only covered itself from this risk but I think it’s picked the correct technology for the future in wireless over cable.
Overall Telstra is now a safe bet to:
- Be very cashed up
- Really focus on the growth side in Telco’s – Mobile or wireless. With the possibility of becoming a larger/stronger dominator and potential to grow (NZ?)
- Focus on its now slimmer operating model
- Have less capex intensive assets, meaning more FCF from current operations
- Maintain the current dividend easily
Remember they don't HAVE to go wireless, they can buy fibre access from NBN just as the others buy from Telstra now..
The key risk in all of this is what Telstra chooses to do with all of this money. They have proven to waste a heap of it in the past, so there is reason to worry. They will be investing heavily into wireless technologies which do have unknowns around speed and coverage. I think these risks are mitigated by the fact the current speed and coverage from a 4G network will satisfy consumers equally to NBN, and should be cheaper. Any changes in technology are then a whole lot cheaper to roll out on mobile networks compared to fixed line ones.
What is funny, is I think Telstra 'could' just reinvent the wheel, and create a dominating wireless network which they then wholesale to a point they have an unfair monopoly..