Australia's dominant phone company, Telstra Corp, will be $5 billion better off working with the government's new high-speed broadband network than competing against it, an independent expert said, paving the way for shareholder approval.
Telstra released the advice to shareholders ahead of a vote on October 18 on its plan to hand over its fixed-line assets to the government's $38 billion network, a cornerstone of one of the nation's biggest telecoms reforms.
Overall, the advantages of the proposal outweigh the disadvantages. Accordingly, in Grant Samuel's opinion, the proposal is in the best interests of Telstra and its shareholders, independent expert Grant Samuel said.
The only alternative for Telstra would be to compete against the $38 billion network, which would require the firm to step up investment in its own networks and face losing access to new digital spectrum, as threatened by the government.
The endorsement came two days after Australia's competition regulator spooked the market by calling for changes in the terms of Telstra's plan to hand over its fixed-line assets to NBN Co, the state-owned company that will build and run the new network.
Telstra shares rose 1.3 percent to A$3.07, outpacing the broader market and recouping the week's losses as investors felt Telstra would be able to meet the concerns of the Australian Competition and Consumer Commission (ACCC).
The fact that they've put this out and they're still trying to stick to a timetable is a positive, said Sondal Benson, an analyst at BT Investment Management.
It also probably highlights the issue with the ACCC is not a major hurdle.
Shareholders have been waiting to vote for the company's plan to separate its fixed-line assets, looking to end two years of uncertainty that sent its shares to record lows sparked by the Labor government's shake-up of the industry.
The majority of the market seems to be in favor of the deal. In fact, you could argue the share price has performed better the more certain the deal has become, said Michael Maughan, an analyst at Tyndall Investment Management, which owns Telstra shares.
The broadband network aims to wire up the entire country to high-speed services and provide a neutral platform on which rival firms, including Telstra, can compete for customers.
Shareholder approval is one of the last key hurdles to Telstra giving up its fixed-line assets, including ducts and access to exchanges, to NBN Co.
Telstra Chief Executive David Thodey said the board was unanimous in advising shareholders to back the plan.
We think it is the better overall financial outcome. It does give us a more stable regulatory environment and greater strategic flexibility going forward, he told analysts and reporters.
Grant Samuel valued the payments Telstra would receive from the government for its infrastructure assets at A$12.8 billion ($13.7 billion), above the A$11 billion estimated by Telstra.
It estimated Telstra would save A$3.5 billion by not having to invest in its own networks to compete against the broadband network, while it would lose A$11.6 billion in cashflows.
Altogether, the company would be A$4.7 billion better off by cooperating with NBN Co than competing against it.
Grant Samuel considered the implications of the broadband network failing or being abandoned, and concluded that Telstra would also be better off under this scenario than one where it chose to compete with a successful broadband network.
The conservative opposition, currently favored to win the next election due in 2013, are against building the broadband network.
Rival Singapore Telecommunications' Australian arm Optus also is handing over assets to NBN Co under a plan that needs approval from the competition regulator.
(Editing by Ed Davies)