The Association of U S West Retirees



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 it."

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 eligible.

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 A$3.50.

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 local yields."

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 McFarland at