The Aussie Broadband Ltd (ASX: ABB) share price is soaring up after it announced a fibre swap agreement with VicTrack.
Aussie Broadband partners up for fibre swap
Aussie Broadband announced a ten year deal with Victorian Rail Track (VicTrack) to swap access to their respective fibre networks. The deal includes two ten-year options.
VicTrack operates Victoria’s fibre assets and is a government business enterprise of the Victorian Government.
Aussie Broadband said that under the swap agreement VicTrack will provide access to its fibre network throughout Victoria and Aussie broadband will do the same for Victrack. Aussie Broadband will also construct access for Victrack to a number of NBN points of interconnect.
The company said that the swap will increase the reach of Aussie Broadband’s fibre network especially into regional Victoria. Metro coverage will also be increased and provide additional redundancy and protection options.
The nitty gritty swap details
Aussie Broadband said that the transaction is a swap of capacity of equal and agreed value with a right of offset on cash consideration such that the cash flow impact on each entity is modest.
Aussie Broadband’s costs to construct the NBN points of interconnect are estimated to be $1.4 million and will be recovered over the initial ten year period of the lease.
The lease of Aussie Broadband’s fibre paths to Victrack takes the form of an operating lease and will be recognised as lease income for $3.1 million per year.
Aussie Broadband will lease Victrack’s fibre capacity for an annual cost of $3.2 million.
The impact on after-tax earnings will be immaterial, but EBITDA will be improved.
Management comments
Aussie Broadband Managing Director Phillip Britt said: “Smart partnerships like this one with VicTrack enables us to not only expand our network beyond what was originally planned, but also frees up capital to improve our reach in other states.”
Summary thoughts on this and the Aussie Broadband share price
Aussie Broadband is a decent business and expanding its reach is a good idea. However, I’m not sure how large Aussie Broadband can become. There is a lot of competition in the space and this isn’t a high-margin industry.
