The dominoes are falling into place for the Federal Government’s NBN. Optus is on board, the board and CEO Mike Quigley is in place. Now for the Federal Government’s big party trick, a deal with Telstra.

This morning, Goldman Sachs JBWere reckons the emergence of Telstra closer than we think, they are calling a deal in the latest research note.

“Telstra and the government will co-operate on the NBN. The benefits of co-operation are compelling for both parties,” Goldman Sachs said.

The compelling nature of the deal referred to be Goldman Sachs comes after the major obstacle to any deal has been removed.

The clean out of Telstra’s management and board of Telstra has removed the obstructionist strutters in Sol Trujillo and the chairman, Donald McGauchie. Now the Federal Government is seen having a far better chance of reaching a commercial settlement with Telstra on reasonable terms to both parties.

The best deal is some sort of co-operation by way of lease or some variation of Telstra’s existing “passive network assets”: the ducts pits and pipes leading into every home in Australia.

That will lower the cost, remove an argument with Telstra over compensation if a fibre was pushed into every home, and brings forward the start date by four or five years, and improves the financing and operating costs.

For Telstra, the deal offsets the loss of their declining copper network business, but leaves it with not only an income stream, but a growing high speed network to match its newish digital backbones in cable, optic fibre and wireless.

Goldman Sachs believes ‘‘Co-operation’ will involve the NBNCo acquiring Telstra’s ‘passive’ physical network assets so the government can: (1) reduce the NBN project’s build cost; and (2) accelerate the NBN project’s deployment. We believe Telstra will retain ownership of the copper.

We value Telstra’s ‘passive’ physical network assets at around $12bn ($1.00 per Telstra share). However, we believe Telstra will sell these assets to NBNCo at around. $8bn ($0.70 per Telstra share), a significant discount to valuation,” Goldman’s media and technology analysts wrote.

We believe these are the assets which most critically affect the: (1) speed; and (2) cost, of the NBN’s deployment.

Clearly, Telstra will be reluctant to divest prized assets such as its Next IP core network, its Next G 3G mobile network, and its extensive fibre backhaul network.

These network assets — together with many others constructed and deployed during Telstra’s business transformation program (BTP) — have delivered, and will continue to deliver, significant competitive advantage to Telstra. We believe Telstra’s stance on these assets will suit the government.”

Consideration will likely comprise a combination of cash upfront and an ongoing annuity stream. We do not believe an equity stake in NBNCo will be palatable for Telstra shareholders, given we estimate:

(1) NBNCo reaches EBIT break-even in FY19; (2) NBNCo becomes FCF positive in FY25; and (3) we value NBNCo at –c.$9bn.

With respect to timing: (1) NBN deployment begins in FY11; and (2) homes passed reaches c.50% in FY17 and c.90% by FY25; and (3) homes connected reaches c.40% by FY20 and c.85% by FY28.”

Goldman Sachs said they were now estimated that the Government funding commitment for the NBN will be around $37 billion ($43 billion was the original estimate)

This comprises: (1) FTTP build cost of c.$29bn; and (2) consideration payable to Telstra for its passive network of c.$8bn.

And, Goldman Sachs links the review of the regulations controlling Telstra with the NBN.

They wrote that a possible result of this review would be operational separation of the Telco, but saw that as unlikely.

This is likely to meet with some opposition from those media companies outside the tent, such as Kerry Stokes’ Seven network, which has taken a 19.9 per cent stake in Cons Media (which owns 25 per cent of Foxtel and 50 per cent of Premier Media Group) in the claimed hope that the review will force Telstra to sell its 50 per cent of Foxtel. Stokes’ camp refuses to say what the assault on Cons Media is based on, though.

Of interest will be the attitude to the suggested deal (if it happens) from News Ltd which owns 25 per cent of Foxtel and 50 per cent of Premier Media Group and controls the management of Foxtel. Some reports have claimed that News might be a buyer if Telstra is forced to sell its half interest in the Pay TV business.

Peter Fray

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