Telstra says vote for separation, or else

Telstra has encouraged shareholders to vote in favour of the $11 billion National Broadband Network deal that will see the company structurally separate, otherwise the company faces having functional separation forced upon it by the government.

Telstra has encouraged shareholders to vote in favour of the $11 billion National Broadband Network (NBN) deal that will see the company structurally separate, otherwise the company faces having functional separation forced upon it by the government.

Telstra options

Telstra diagram to explain the choice facing shareholders
(Screenshot by Josh Taylor/ZDNet Australia)

Australia's largest telecommunications company today delivered its long-awaited explanatory memorandum to investors via the Australian Stock Exchange. The memorandum is designed to give shareholders an understanding as to all aspects of the $11 billion deal between Telstra and NBN Co that will see the telco structurally separate its wholesale and retail arms, lease pits, ducts and dark fibre to NBN Co, as well as migrate its copper and hybrid fibre-coaxial broadband customers onto the National Broadband Network.

Ahead of the 18 October Annual General Meeting to be held at the Sydney Convention Centre, Telstra chair Catherine Livingstone told Telstra shareholders in the explanatory memorandum that the company will be $4.7 billion better off by voting in favour of the deal than against the next best alternative, according to an independent analysis by investment advisory group Grant Samuel.

"The government's policy initiatives will result in a net loss of value of Telstra overall, irrespective of whether Telstra participates in the roll-out of the NBN. Given this overall adverse effect, the directors responded with an extensive process to ensure the best outcome for Telstra and Telstra shareholders in these circumstances," she said.

Livingstone warned that if shareholders voted against the deal, the prospects for the telco would be much worse.

"Without the Definitive Agreements, Telstra would continue to operate its copper network and HFC cable network, but would largely forgo the approximately $11 billion value of the proposed transaction, would experience infrastructure competition from the NBN, would incur the significant costs and disruption of mandatory functional separation and would face potential exclusion from future wireless spectrum auctions."

For Telstra shareholders who may be seeking to vote against the deal because they are politically opposed to the NBN roll-out, Livingstone indicated that even if the government — or a future coalition government — were to not go ahead with the NBN roll-out, Telstra shareholders would still be better off voting in favour of the deal.

"If the roll-out of the NBN is not completed as planned, Telstra shareholders would still be better off if they approved the proposed transaction and even if the likelihood of the NBN being terminated early were materially increased by shareholders not approving the proposed transaction, the expected value of Telstra if the proposed transaction is implemented is greater than under the next best alternative," she said.

If Telstra shareholders ultimately vote against the recommendations of the board, and decide not to proceed with the NBN deal, Telstra said in the memorandum that it expects to incur $1 billion in costs over the next five years in order to involuntarily functionally separate its retail and wholesale businesses as will be required under law.

"These costs would relate largely to establishing new IT systems and duplicating business processes to support and maintain separate business divisions," Telstra said.

Rising NBN prices a risk

Although Telstra believed that voting in favour of the deal is in the best interests of its shareholders, there were a number of risks associated with going ahead with the deal. Chief amongst the risks is the warning that although the basic $24 per month wholesale package locked in as part of its access agreement with NBN Co, the government-owned wholesaler still had the ability to raise prices.

"NBN Co can increase the amount it charges Telstra for its BSO [basic service offering] during the term of the access deed in certain circumstances, including where the ACCC regulates a higher price for the BSO or the minister makes a determination in accordance with statutory powers that requires a higher price," Telstra said.

"If NBN fibre network access prices increase more than Telstra anticipates, Telstra's costs will be higher than it anticipates and this may materially adversely affect the value of the proposed transaction to Telstra and/or Telstra's financial position and performance."

The concerns reflect those raised recently by Shadow Communications Minister Malcolm Turnbull, who pointed to a clause in NBN Co's special access undertaking that specifies that the NBN Co could potentially raise the price of products outside the $24 offering by up to 5 per cent higher than the annual CPI (consumer price index).

Telstra appears to be pushing ahead with the shareholder vote, despite having to rework its structure separation undertaking with the Australian Competition and Consumer Commission (ACCC). If the ACCC has not decided on whether to accept the undertaking by 18 October, Telstra has indicated that it may seek to have shareholders vote on the deal anyway, subject to final approval by the competition regulator.