Why Telstra’s shareholders should own half of the National Broadband Network: Kohler

A simple way forward for the National Broadband Network and for Telstra has now emerged.

It may not be taken because the parties can’t agree on value, but it’s now clear that everyone involved knows what the best plan is: direct ownership of the NBN Company by Telstra shareholders.

Communications Minister Stephen Conroy revealed yesterday that he supports the idea in my interview with him on the ABC’s Inside Business program.

I asked whether it would make sense for Telstra shareholders to own the NBN Co directly, rather than through a structurally separated Telstra Network Company, and he said: “Sure, that’s something we’re absolutely prepared to look at”.

He went on: “I think that’s a very sensible suggestion that a number of people have made recently and it’s certainly something we’d be prepared to consider, [to] actually give direct participation to those shareholders in NBN Co”.

This is the first time the idea has been aired publicly but it is high on the agenda privately among the main players.

Here’s how it might work.

The Government capitalises the NBN Co with $22 billion in equity, as originally proposed when the plan was floated ($4.7 billion from the Building Australia Fund and $17.3 billion in new Government debt). The cash would not need to be transferred immediately into the NBN Co’s bank account: the balance sheet would work with the asset being a commitment from the Government.

The NBN Co then buys Telstra’s copper network, telephone exchanges and ducts for scrip, at a valuation of $21 billion, and the NBN Co shares are distributed directly to Telstra shareholders rather than held by the company.

That value would mean the balance sheet of NBN Co would add up to $43 billion – the Government would have 51% and Telstra shareholders 49% directly. Telstra would be instantly “structurally separated”, since the company would no longer own its network.

The Government is about to announce the chairman and board of directors for NBN Co. If the above scheme were to happen they would, in effect, become the board of Telstra’s wholesale network business. Its current CEO, Paul Geason and his team could simply transfer across and work for them.

As soon as the appointment is made, the NBN Co chair will start negotiating the value of Telstra’s network with Telstra’s board and management. An independent valuation would be needed as well.

Would it be $21 billion – a neat 49% of $43 billion? Probably not, unless the Government and Telstra have already secretly negotiated it, which is where the $43 billion figure came from the first place. But that’s highly unlikely.

Also, there will be other telcos banging down the NBN Co’s door trying to sell it network assets, including Optus, Nextgen and a few others.

In my interview on Sunday, Senator Conroy acknowledged that there would be other network assets available for the NBN to buy, but he said that the one “cap” that was non-negotiable was that the Government must own 51% of NBN Co, at least temporarily.

That means the Government will have to match, plus a bit more, the value of any assets put into it with cash and firm commitments.

One can easily imagine $25-30 billion worth of existing network assets being sold into the NBN Co at the beginning. So far, $20 billion has been allocated to the Building Australia Fund, but that money is supposed to be spent on roads, rail and ports, as well as the NBN.

No matter what the eventual cost of the NBN, to maintain a 51% shareholding the Government would have to commit to providing, as equity, an amount equal in net present value terms to the net assets of NBN Co once the dust settles on asset transfers.

But that doesn’t mean the Government can’t borrow the money as the new fibre-to-the-home (FTTH) network is built over time.

At the end, according to Stephen Conroy, the 51% stake will be sold, at which point the Government could repay the debts. Alternatively, it could simply issue convertible debt at the beginning that turns into equity progressively over the next decade as the fibre network is built.

This article first appeared on Business Spectator.