NBN Telstra Deal Signed Details Announced

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Telstra has today signed Definitive Agreements with NBN Co and the Commonwealth for its participation in the rollout of the National Broadband Network (NBN). The deal will deliver an $11 Billion windfall for Telstra. Shares are expected to rise today when the market opens.

Telstra CEO David Thodey will host a Conference Call at 11.00am.

The agreements remain subject to the satisfaction of a number of conditions, including the critical step of ACCC acceptance of Telstra’s structural separation undertaking and approval of its migration plan.

Telstra chairman, Catherine Livingstone, said the Definitive Agreements needed the approval of a majority of Telstra shareholders with the vote currently scheduled for the company’s Annual General Meeting (AGM) to be held in Sydney on 18 October 2011.
 
“The signing of these agreements is another important step following two years of complex negotiations between Telstra, NBN Co and the Government,” Ms Livingstone said today.

“The Government’s commitment to the NBN and other related policy changes meant that the Telstra Board had to decide whether the company should participate in the NBN rollout or pursue other options.  The decision to participate was made on the basis that the proposed transaction is expected to provide us with the ability to recover more value for the business than the available alternatives, given the loss of value after the NBN policy announcements.

“After rigorously assessing the options before it, including the regulatory and commercial implications of each, the Telstra Board expects to recommend that shareholders approve a proposal to participate in the NBN rollout, subject to the conditions precedent being satisfied.”

Telstra is preparing an Explanatory Memorandum (EM) which will outline the basis for the Board’s recommendation to shareholders.

The EM will include an independent expert’s assessment of the proposed transaction in the context of alternative options, and will be provided to shareholders approximately one month before the shareholder vote.

The agreements provide Telstra with replacement revenue, through disconnection payments as the rollout of the NBN occurs, and new revenues, through access payments for the use of Telstra’s infrastructure over an assumed average 30 year period.  Consistent with the Financial Heads of Agreement signed in June 2010, the arrangements under the Definitive Agreements and associated Government policy commitments are expected to deliver approximately $11 billion in post-tax net present value over their long-term life.  This value will not be in the form of an upfront payment, but is the present value of payments to be received over many years. This value is also subject to a range of dependencies and assumptions over the life of the agreements.

Telstra expects that the consideration for the disconnection of its relevant copper and HFC cable broadband services, as well as appropriate commercial terms for scale access to its infrastructure, together with benefits from associated Government policy commitments, will produce a net result that is superior to other options realistically available to the company.

Key components of the Definitive Agreements are as follows:
· Telstra has agreed to disconnect, progressively, copper-based Customer Access Network services and broadband services on its HFC cable network (but not Pay TV services on the HFC) that are provided to premises in the NBN fibre footprint, and will migrate its services onto NBN-based services, over the expected 10 year build period of the NBN;
· Telstra will provide NBN Co with large scale access to certain infrastructure – dark fibre, exchange space, lead-in-conduits and ducts – at prices based on committed large volume levels of usage and availability.  The term of the infrastructure agreement will be between 35 and 40 years (the precise term depends on a number of factors including NBN Co’s rollout schedule) from commencement, plus two 10 year options to extend exercisable by NBN Co.  The infrastructure will be taken over the course of the NBN rollout and payments made for an assumed average period of 30 years.

  In order to maximise the availability of this infrastructure, Telstra will undertake necessary work on the infrastructure.  Telstra retains ownership of all infrastructure assets, except for those lead-in-conduits used by NBN Co which will become NBN Co property once used;
· The Government has agreed to a package which includes increased funding for the delivery of the Universal Service Obligation (USO), clarification of Telstra’s USO responsibilities for the supply of infrastructure in new developments in the NBN environment, and the avoidance of certain costs to Telstra through various funding measures such as funding of a public information campaign, and for employee retraining; and
· Telstra and NBN Co have also agreed to key product feature and price commitments relating to NBN Co’s basic voice and data offering.  These will be addressed in NBN Co’s full product terms, which remain subject to further development and industry consultation.

Telstra expects to incur the following cash expenditure to support these arrangements over their life:
· approximately $0.9 billion (post-tax NPV) for necessary work on infrastructure and customer migration costs.  These will be offset through savings in legacy network, product and IT investment, therefore enabling them to be covered within Telstra’s existing 14% capex to sales target;
· approximately $0.6 billion (post-tax NPV) for necessary work on infrastructure and maintenance activities, which are covered within existing operational expenses, as Telstra routinely projects such costs on an ongoing basis;
· approximately $0.5 billion (post-tax NPV) incremental operational expenses, spread over 10 years, for those customer migration costs and the necessary work on infrastructure which have been brought forward as a consequence of the NBN rollout.  These costs will be absorbed within existing expenditure profiles.

Given the projected phasing of the NBN rollout plan, the impact of the agreements on Telstra’s financial profile in FY12 is not expected to be material.

“These agreements represent an important milestone in addressing much of the uncertainty for Telstra associated with the NBN and Government regulation and allow us to focus intently on our customer service and simplification strategy,” Telstra Chief Executive Officer David Thodey said.

“The Government will achieve its desired industry structure and the arrangements for the USO and associated social obligations will be reformed to ensure that funding for these public interest services is secured.  Within this new environment, we look forward to continuing to focus on customer service, content and innovation.

“The Definitive Agreements are subject to a number of conditions being satisfied, including ACCC acceptance of Telstra’s structural separation undertaking and approval of its migration plan, sufficient regulatory certainty on related matters, confirmation of tax determinations, and arrangements being in place for the appropriate reform of the USO.
“Finally, it is important to note that the arrangements under the Definitive Agreements are unique for Telstra in terms of their nature, timeframe and scale.”

A financial summary of the proposed arrangements, a high level summary of the Definitive Agreements (including the steps that remain to be finalised prior to a shareholder vote), and a set of Frequently Asked Questions are attached.

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