In an unexpected way, the credit crunch, and the problems of outfits like Babcock & Brown, will help the Terria consortium with its bid to build the new national broadband network.
In an unexpected way, the credit crunch, and the problems of outfits like Babcock & Brown, will help the Terria consortium with its bid to build the new national broadband network.
As Business Spectator has been showing recently, investors and banks are turning off “stapled” entities and looking, instead, for clean infrastructure plays. Property trusts are beginning to unstaple from development companies, infrastructure funds are being privatised and the Babcock & Brown model is in fresh trouble after yesterday’s devastating profit downgrade.
The Terria consortium of medium and small telcos, and its investment bank Investec, are now putting together the funding for their fibre-to-the-node broadband bid.
Only one of them – Singtel Optus – is putting in equity ($2 billion) and the rest of the money will be a combination of bank debt and equity from both the Government and super funds. It will be a clean, part-Government owned infrastructure utility with just one asset, almost certainly publicly listed before the network build is completed.
Telstra, on the other hand, is what you might call a stapled entity. It is, and always has been, a combination of an infrastructure asset – the public switched telephone network (PSTN) – and a branded retail access business built on top of it. The infrastructure now includes fixed and wireless broadband.
Telstra has the added risk of a forthcoming wholesale management spill – probably just as the FTTN project is completed. CEO Sol Trujillo was appointed three years ago. His contract has no term but the general assumption is that he and his American colleagues will go home in a year or two at the most.
They have undoubtedly done a good job; they have protected Telstra’s fixed line market share through a combination of aggressive regulator relations and margin squeeze, and they have blown away the competition with the NextG wireless broadband network.
But a lot of that work will be undone if the company does not win the right to build the next generation fixed broadband network.
There are two keys to this – getting the funding, and getting the decision from the Government.
In my view Telstra is fine with the funding but in trouble with the decision. For Terria, if anything, it’s the reverse.
Interestingly this is not a purely political decision – if it were, then Telstra might be in a better position than Terria because it might be seen as safer. But the Minister, Stephen Conroy, has appointed a “panel of experts” to advise on the decision, and while the final call remains his, it would be hard for him to vote against a unanimous recommendation from the panel.
The panel is chaired by the secretary of his department, Patricia Scott, and includes Treasury Secretary Ken Henry, former Communications Authority chairman Tony Shaw, Professor Rod Tucker from Melbourne University, Professor Reg Coutts from Adelaide University, Tony Mitchell, chairman of Allphones, and John Wylie, CEO of Lazard Carnegie Wylie and a shareholder of Business Spectator.
Everyone in telecommunications these days is trying to figure out which way these characters might lean when it comes to a crunch decision between equally attractive bids (obviously if one is clearly superior to the other it is no contest).
Here is my read on them: Scott – Telstra; Shaw – Terria; Mitchell – Terria; Coutts – Telstra; Wylie – Terria (and I have no knowledge about this). Ken Henry is hard to pick but probably pro-Terria.
If I’m right, that’s four to two without a vote from Tucker. We don’t know whether this will be a vote or a consensus, which really only matters if they are split down the middle. In a consensus or unanimous outcome, one side has to prevail and advise the minister accordingly.
The technology and build time between the two bids should be equivalent – after all they will be employing the same international contractors to build it.
The key difference will be funding and, in particular, whether Terria can sign enough money by the 25 November lodgement date.
Market conditions, and the shift towards single-purpose infrastructure plays, as opposed to stapled or omnibus funds like those of Babcock & Brown, will play an important role in this.
As I understand it, Terria will put in a couple of alternatives for negotiation – one where the Government’s $4.7 billion is entirely equity, and carries two board seats, and another where it could be a combination debt and equity, with more equity from the market.
Connected to the funding equation is the question of how much of the network must be fixed line, and whether some, or even all, of the rural areas can be covered by wireless solutions, that is satellite and WiMAX spectrum.
If it can be largely wireless, the build cost can be kept to as little as $12 billion, in which case Singtel’s $2 billion and the Government’s $4.7 billion is plenty of equity.
If it must be all fixed optic fibre cable, then the cost approaches $20 billion and more equity is needed.
The Government has not given any hint about this and it looks like it will have to be discussed after bids go in on 25 November, which means the initial bids will have to be flexible.
Investec has already started getting signatures to letters of intent from bankers and is talking to super funds about equity.
It’s possible that the initial bid will simply be based on bank lines of credit to provide comfort to the panel of experts that the funding is in place, with the debt and equity structure to be worked out later, including an IPO.
But there is absolutely no reason the Terria/Investec consortium can’t win this.
This article first appeared on Business Spectator
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