Australia to Lure Telstra Investors With Entitlement Offers
By Lyndal McFarland
The Wall Street Journal
Sunday, August 27, 2006.
SYDNEY -- The Australian government Sunday said it will use
entitlement offers to lure retail investors back into the
struggling Telstra Corp. as part of its plan to sell eight
billion Australian dollars (US$6 billion) worth of stock.
Institutions that are already investors in Australia's
biggest telecommunications company might receive a similar
offer, putting them at the top of the allocation list, a
person with knowledge of the privatization said.
Canberra is already counting on an installment receipts
system that gives investors an early yield of nearly 15% to
allow the sales process to begin as planned in October.
"This is the right time to make this offering, it is not a
fire sale and the market is fairly reflecting the value of
the company," Finance Minister Nick Minchin said.
Any further delay in the sale, and a lukewarm response from
local small investors, would be a significant political
embarrassment for Prime Minister John Howard's conservative
government, which heads to the polls sometime next year.
If the early sales pitch reveals more demand than expected,
the government also has the flexibility to increase the size
of the offer, reducing the amount that will be transferred
into the Future Fund, people familiar with the plan said.
This fund, which will ensure government pension liabilities
are met, is currently earmarked to receive about A$14.5
billion of Telstra shares, and can only sell down its
holding after two years.
Mr. Minchin, who is leading the government's sale, confirmed
that the government is looking at entitlements for retail
investors as it offloads its 51.8% stake in Telstra. "We
are contemplating some form of entitlement for existing
[retail] Telstra shareholders, and the details of that will
be revealed closer to the offer," he told Channel Nine.
"Obviously we will seek to make it an attractive offer.
We've already announced that it will be sold by
installments, and there will be further information
available on the nature of the offer as we get closer to
Another person familiar with the sales process said retail
investors can expect an entitlement offer of around one new
share for every five held, although an offer could be more
favorable. The precise details will be determined in
mid-September, but retail investors will need to be on the
register a few weeks before the prospectus is launched to be
The government also plans to provide some incentive for
domestic fund managers and larger buyers who have kept their
Telstra in their portfolio despite the sliding share price.
"The Australian market generally is underweight this stock,
but there have been a number of very loyal institutions
which have been overweight, so we'd consider some form of
entitlement for them, although no final decision has been
made," the source said.
Prime Minister John Howard announced plans late Friday to
sell A$8 billion worth of stock, or around a third of
Canberra's 6.44 billion shares, closing out his decade-long
ambition to get Telstra off Canberra's books.
The sale of this third and final tranche, a process called
T3 by investment bankers, has been in jeopardy for most of
the year amid profit downgrades by Telstra management,
constant bickering with lawmakers and regulators, and a
slumping share price. T3 was once envisaged as the world's
largest equity offering at about A$34 billion, but the
significance of the sale to global markets has dimmed in the
past 18 months as the share price slumped from around A$5.25
in previous budget papers to Friday's closing level of
Bankers hope an entitlement offer will help to put a floor
under Telstra's share price, which is expected to fall when
trade resumes Monday having already lost more than 30% since
chief executive Solomon Trujillo took over in July 2005.
Justin Cameron, a telecom analyst at Credit Suisse, said a
1-for-5 entitlement should result in strong short-term
demand. Mr. Cameron also tips a discount for retail
investors in addition to the installment receipt, which will
allow investors to pay around 60% of the price upfront and
the remainder 18 months later, boosting the stock's yield.
The government hopes international investors will also be
drawn to Telstra, now that it is trading more in line with
its overseas peers. Feedback from Mr. Trujillo's recent
roadshow to the U.S and Europe has been "good," according to
Peter Hunt, executive chairman at Caliburn Partnership, one
of the four investment banks advising Canberra on the sale.
Its advisory panel also includes UBS, ABN AMRO Rothschild
and Goldman Sachs/JBWere. With solid interest out of Asia,
Mr. Hunt said the Japanese market is likely to be a
particular focus "because of the high yield relative to
Telstra recently confirmed that it will pay dividends
totaling 28 cents for the current year to June 2007. But
the Melbourne-based company won't guarantee the level of
dividend payments after that, pointing to uncertain
regulatory outcomes. Many market analysts, including
Citigroup's Tim Smeallie, expect Telstra will cut annual
dividends to 20 cents for the year to June 2008 and beyond.
Investors also remain concerned about the earnings outlook,
with competition from rivals such as Singapore
Telecommunications and Vodafone Plc likely to intensify.
Write to Lyndal