The share price of telecommunications giant Telstra Corporation Ltd (ASX: TLS) has risen 1.8% to $3.36 in morning trade following an announcement that it has signed a definitive agreement with News Corp (ASX: NWS) to combine pay television entities Foxtel and Fox Sports Australia.
News Corp had previously owned 100% of Fox Sports Australia whilst combining with Telstra in a 50/50 split for the Foxtel business. Under the new deal, News Corp will own 65% of the combined entity with Telstra owning the remaining 35%.
News Corp will also appoint four directors (including the chairman) to the combined entity's board of directors as well as the senior executives, whilst Telstra will appoint two directors. The combined entity will be consolidated into News Corp's financial statements and the proposed transaction is projected to be completed in June before the current financial year ends.
The competition watchdog, the Australian Competition and Consumer Commission (ACCC) had previously raised concerns about the combined venture lessening competition in the sector. However, it eventually decided not to oppose the merger late last year after completing its review of the proposed transaction.
Telstra's investment in the new combined venture will be accounted for on an equity basis. Thus, Telstra expects to book a one-off accounting gain estimated to be around $263 million which represents the fair value of the combined business over its book value. This amount is still subject to change depending on when the deal will be completed and any possible final adjustments. However, despite the one off gain, Telstra has stated that guidance for the 2018 financial year will not be changed.
Foolish takeaway
Today's announcement brings some good news to long suffering Telstra shareholders as the company tries to recover after a difficult 12 months. After going ex-dividend last week, Telstra's share price sunk to new 52-week lows of $3.26, during Friday's trading session. Telstra has not traded at these kinds of levels since March 2012 as investors continue to weigh the impact of its dividend cut announced last August, the $3 billion earnings hole predicted to occur from the NBN's impact to its traditional earnings streams, and increased competition in the mobile space.
