Telstra in $9.6 bn govt deal, shares jump

MELBOURNE, AUSTRALIA: The worst is probably over for Australia's largest phone company Telstra Corp after it struck a $9.6 billion deal with the government to hand over its fixed-line network, pushing its shares to a four-month high.

The deal value was at the top end of market expectations, but with crucial details of the pact yet to be hammered out, analysts said the threat of Telstra being split still remains.

"Until we see a lot more of the detail and get a much stronger handle on what the real impact is going to be on the capacity of the company to operate successfully, I don't think shareholders will be feeling comfortable," said Helen Dent, chairwoman of the Australian Shareholders' Association.

After nine months of talks during which the government had planned to force a break-up of Telstra, both parties agreed that a state-controlled firm will rent Telstra's assets under a long-term lease to help build a broadband network worth more than $33 billion.

Telstra had recently acquired China's LMobile.

Telstra shares jumped as much as 7.1 per cent to an intra-day high of A$3.46, before paring gains to end 3.4 percent stronger. The intra-day rise was the biggest since early 2000. Volume at 212 million shares was 4.5 times the daily average volume traded over the past 30 days.

"We've got regulatory hurdles and shareholder approvals to come, so while it likely is in the basket, there are enough people out there wanting to take the profits on the day," said CMC Markets analyst David Taylor.

Two months back Telstra had dismissed a rumour that it had reached an agreement to sell its network to the government.

Australia has slower and more expensive Internet than the rest of the world and when Prime Minister Kevin Rudd took over in 2007, he had promised to develop a superfast broadband network.

Under the A$11 billion ($9.6 billion) deal announced on Sunday, the National Broadband Network Co will pay Telstra to progressively hand over its fixed-line customers as NBN Co rolls out its fibre optic network and pay for access to Telstra's ducts, trenches and exchange space.

Tesltra, a former government monopoly which was privatised in 1997, will then decommission its copper and cable networks in stages.

The deal consists of A$9 billion of direct payments for the network and an estimated A$2 billion in savings through the relaxation of other regulations.

Telstra acknowledged on Monday that a lot of important details still needed to be negotiated with the NBN Co before it could put the agreement to a required shareholder vote.

"We have got to this position, and we're pleased to have done so because it does give us clarity and that's what this company needs," Telstra chief executive David Thodey said on a conference call.

Telstra anticipates a shareholder vote in early 2011, once the deal's details have been finalised.

The competition regulator must also approve the deal.

Telstra has constantly been challenged by rivals for stalling on providing access and for charging unfair access fees. Its rivals, including local arms of Telecom Corp of New Zealand, Vodafone and Singapore Telecom's Optus had called for the company to be split.

Telstra has a price to earnings ratio of 10 versus 12.4 for SingTel and 8.6 for Telecom Corp, according to Thomson One data.

Telstra could still face break-up

Thodey said cash payments are likely to peak in years four to six of the network rollout, adding the A$11 billion payment referred to the net present value of long-term payments.

The cash would better position Telstra to grow its share of the market and invest in new products and services to work in the superfast broadband world, he said.

"It's good a deal has been done, and it looks a little better than expectations, so a net positive," said White Funds Management portfolio manager Angus Gluskie.

"It would have been in no-one's interest for the debate and lack of action to continue."

The jury is still out on whether Telstra can avoid being split.

"It's not entirely off the table," Chief Financial Officer John Stanhope said, "it may be a necessary condition later on. But in this current financial heads of agreement it is not one of the principal points."