commentary Telstra chief executive David Thodey is obviously keen to make the National Broadband Network (NBN) work for the benefit of Telstra shareholders.
After seeing $10 billion wiped from the Telstra share price following the company's exclusion from the NBN Mark I, Thodey made it clear in his first press outings that he wants a seat at the government's NBN table.
But if the latest well informed NBN scenario planning is right, Thodey will have to accept that even an optimal outcome for both Telstra and the government will not deliver dramatic returns for Telstra's one million shareholders.
After seeing $10 billion wiped from the Telstra share price following the company's exclusion from the NBN Mark I, Thodey made it clear in his first press outings that he wants a seat at the government's NBN table.
In interviews with two News Ltd papers and three Fairfax papers late last week, Thodey delivered four key messages: he stands by his predecessor's 2010 revenue and margin forecasts; he is a believer in the "nation-building" NBN; he sees no need for structural separation; and he admits there is a problem with the company's IT transformation.
There was one other key message: he's a good bloke.
Comments he made to The Australian about the NBN are similar to those on the minds of just about everyone in the telco industry. He told The Australian: "In looking at the options around NBN Co, it is a clean sheet of paper. We are here to look after shareholder value and to find a solution through the regulatory environment, the government and investment environment and the shareholders, so we are looking at every alternative."
"If you were to vend in assets, what value would be put on the assets, as opposed to book value? What is the operating structure going to be? I cannot answer that question now but it must drive shareholder value. I am absolutely convinced the government is going to do it. And therefore my priority is to find a way that we can participate that is sensible."
Telco analysts are asking these questions and coming up with answers that suggest even an optimal solution for shareholders will not put a rocket under the share price. The dividend will be safe, but earnings per share (EPS) growth will be mild.
Sameer Chopra, an analyst at Deutsche Bank, has released the first NBN scenario planning that incorporates the up-to-date cost variables for a fibre-to-the-home (FTTH) network used in an analysis by the New Zealand government.
Chopra, who last week dumped a two-year buy recommendation on Telstra and put the stock on hold, says the NBN can be built for $28 billion, but that will require a collaborative effort from Telstra.
He presented three scenarios in addition to the do-nothing case. The scenario he favours involves selling Telstra's fixed copper network, meaning the exchanges and ducted copper pairs, to the NBN Co in exchange for 30 per cent equity and transferring $8.5 billion in debt to the new owner. The $8.5 billion is halfway between estimated market value and book value.
This would be EPS neutral. After the sale of the copper network, Telstra's margins would fall from a range of 46 to 48 per cent to a level closer to its international peers of about 40 per cent.
However, Chopra says the sale of Telstra's network would allow NBN Co to be EBITDA positive from the start in fiscal 2015. Depreciation and amortisation, however, would mean net losses for at least three years. This scenario planning for the NBN does not include the cost of set-top boxes and cabling premises which would cost $1200 to $2400 per household or about $10 billion to $20 billion.
The take-up of the fibre services will be a major determinant of the final cost of the NBN. Chopra estimates a take-up rate similar to overseas markets of 25 to 30 per cent in the first five years.
The difference between Chopra's NBN scenario above and his base case, whereby Telstra stays out of the NBN and tries to protect its fixed-line customer base, amounts to about a 1 cent difference in earnings per share in fiscal year 2015.
The questions asked about the NBN by Thodey and the NBN scenarios presented by Deutsche Bank came in the same week that a member of the government's NBN expert panel, Reg Coutts, told a seminar in Sydney that one of the biggest issues to be faced by the government is the shortage of available skills.
Coutts, who disappointed many at the Australian Computer Society Seminar by being unable to explain where the $43 billion NBN expenditure figure came from, reckons a light has recently gone on in Canberra about the huge level of work required to execute the project. He says everybody involved has looked at each other and repeatedly said: "Oh shit."
This article by Business Spectator's Tony Boyd is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
2%
4%
Think of a number and double it... why not choose "42"... that could have been the answer to the ultimate NBN question... of life and everything!!!