Wednesday, August 06, 2014

I expect more from finance journalists - Kohler and the Telstra cash

In a column today Alan Kohler speculates on what Telstra is going to do "with all that money."

He revisits the Government's NBN deal with Telstra using the Scales report as an excuse - because Scales, of course, only reported on the period before the agreement and it was out of scope.

There is nothing wrong with playing the "what should Telstra do" game - but at least it should be accurate in describing what Telstra has before it.

Kohler writes of the NBN payments to Telstra:

The $11bn is net present value. The actual money to be paid to Telstra under that agreement is closely guarded but will amount to at least $50bn. Some have put it at $100bn. Let’s call it a lot more than $11bn.

He adds, in rejecting thoughts that Thodey might decide to retire,

But I suspect spending $50bn or so transforming Australia’s largest industrial company will prove irresistible: he will stick around at least long enough to set the company’s course and entrench his legacy.

The problem with all this is that $11B is the "actual money" to be paid to Telstra (actually $13B because you need to add the value Telstra is getting directly from the Government including $450M in cash already provided). Yes it is true that in one report Goldman Sachs added the yearly payments over 35 years and got the answer $95B. But $95B today is not the same as $95B in the 35th year.

So the actual value today is the Net Present Value. Put it this way, what value of house could you buy with the set of cash flows that make up your monthly mortgage repayments? The one you have! So the asset that can be purchased by the NBN cash flows is $11B.

But the real issue is that Telstra valuation was based on what it was forgoing - in particular the forward revenue flows from line rentals - both retail and wholesale (in the form of ULL). Part of that comes in the form of the ongoing annual payments for duct rental - which is about half of that NPV. That is - it is all cashflow Telstra expected to have anyway.

The other half comes from the disconnection payments, which are made over the next six years (under the original plan) but still only amount to the bringing forward of the other half of the future revenues foregone.

The Telstra piles of cash is a complete and utter myth and finance journalists should do better than this.

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