(Updates with Moody’s review in eighth paragraph.)
June 23 (Bloomberg) -- Telstra Corp., Australia’s biggest phone company, agreed to hand over its fixed-line assets in exchange for A$11 billion ($11.6 billion) to clear the way for the rollout of a government-owned high speed internet network.
NBN Co., the government-owned national broadband network builder, will lease access to carriers on the fiber system to be completed in 2018 with Telstra to receive its compensation over three decades, the Melbourne-based carrier said in a statement today. Singapore Telecommunications Ltd., owner of second-ranked Optus, will get about A$800 million under a similar agreement.
Telstra, which also rents its network to other carriers, will give up its slower copper-wire assets to focus on selling voice and Internet services over the NBN system, according to the statement. The agreement, signed 21 months after the government first demanded Telstra be broken up, enables Prime Minister Julia Gillard to build the A$36 billion network that helped her win the support of independent lawmakers in last year’s election.
“There will be some relief the deal has been done,” said Will Seddon, who helps oversee about $350 million at White Funds Management in Sydney and owns shares of Telstra.
The carrier said it may return the government cash to shareholders when the phase out of its copper network is completed. Telstra will spend about A$2 billion to switch customers and maintain its copper network while the fiber system is being built, according to the statement.
Telstra fell 2.3 percent to A$2.96 at the 4:10 p.m. close of trading in Sydney. The stock has gained 6.1 percent this year compared with a 5.2 percent decline in the benchmark S&P/ASX 200 index.
The deal, which requires Telstra shareholder approval, won’t significantly affect the carrier’s finances in fiscal 2012, the company said in a statement.
Telstra’s A2 credit rating was put on review for a possible downgrade by Moody’s Investors Service, which cited the risk of reduced profitability from the loss of its monopoly position through ownership of the copper network.
“The company will start operating on the same footing as other alternate network providers, substantially lessening its current fully integrated nature,” Ian Lewis, a senior credit officer at the credit rating company, said in a statement today “The current A2 rating incorporates the beneficial impact of maintaining the network business and its high profit margin.”
Telstra will get about A$4 billion in disconnection payments over a 10-year period with about A$5 billion to be gained in infrastructure payments over 30 years, it said.
The company will continue to provide pay television services over its cables and the mobile networks are unaffected.
NBN will lay fiber to 93 percent of the population by 2018. The rest will be served by wireless and satellite connections.
As a former state-owned monopoly, Telstra owned Australia’s only national fixed-line phone network, while Optus built its own cable assets in metropolitan areas. That enabled them to keep almost all the revenue from services they sold.
Opposition lawmakers have said the government is spending too much money by replacing existing cable with new fiber.
“There’s no question of anything being destroyed or ripped up or terminated,” opposition spokesman Malcolm Turnbull told Australian Broadcasting Corp. radio today. “What we should be doing is identifying those areas where the service is inadequate, moving swiftly to upgrade them so that the service is adequate, and then over time upgrading the national network.”
The agreement has a A$500 million break fee that may be paid if the deal is changed by a new government, Finance Minister Penny Wong told reporters in Canberra today.
“The Telstra Board expects to recommend that shareholders approve a proposal to participate in the NBN rollout, subject to the conditions precedent being satisfied,” Telstra Chairman Catherine Livingstone said in the statement.
The agreement requires antitrust approval and will need majority support from Telstra investors, who will gather at the company’s annual meeting on Oct. 18.
The plan to bring high-speed Internet to some of Australia’s remotest corners drew fire ahead of last year’s Aug. 21 general election for its cost. Gillard clung to power by forming a minority government with independent lawmakers from rural regions who welcomed improved services.
--With assistance from Shani Raja in Sydney. Editors: Suresh Seshadri, Dave McCombs
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