dead cat bounce, page-3

any chance left for t3 ??? Who would buy? At what price?


Far from perfect future for troublesome T3
By Stephen Bartholomeusz
November 17, 2005

NOW Nick Minchin really does have a problem and it increasingly looks like Peter Costello's Future Fund may be the only solution.

In the wake of this week's Telstra strategic review briefing, and the fairly savage sharemarket reaction to the radical, expensive and, in the near term, earnings and dividend-destructive transformation plan, the notion that T3 can occur as planned late next year is effectively dead and buried.

With Telstra foreshadowing a profit fall of as much as 30 per cent this financial year and low single-digit growth over the course of the rest of the decade, T3 could only be pursued at price levels that would be unpalatable to the Government.

Indeed, the Government's preferred timetable would see T3 occurring at precisely the worst moment for a sale of its magnitude — immediately after the profit fall but well before, perhaps years before, the results of a restructuring laden with execution risk are apparent and capable of being assessed.

Exacerbating the political and economic risk for the Government would be the possibility that Telstra has overlaid the review with its own "spin" by exaggerating the "status quo" outcomes but understating the positive impacts of its strategies. There would be a risk that T3 might occur at an overly gloomy low point in Telstra's fortunes but just ahead of a steeper than anticipated bounce-back that transferred massive amounts of value from the taxpayer to private shareholders.

The Government has levers it can pull to improve the prospects for maximising the value it would receive for its Telstra shares. It could defer the sale for 12 months to allow time for the success or otherwise of the transformation efforts to show through. It could also ease Telstra's regulatory burden.

Deferring the sale would either push T3 into an election year or beyond. The original timing for the sale was dictated by a desire to distance it from an election and prevent Telstra becoming an election issue.

It is unlikely the political considerations have changed.

With no guarantee the Government will retain office, let alone control of both houses, allowing the T3 timetable to slip beyond the election would be even riskier if the Government is committed to completing the privatisation.

Similarly, the Government has effectively committed itself to a tougher regulatory regime, including an effective operational separation regime, de-averaged pricing for wholesale access to Telstra's unbundled local loop and rough parity (or averaged) prices for urban and non-urban customers.

Telstra's relatively modest post-transformation growth prospects are predicated on "reasonable" regulatory outcomes and Telstra has made it clear it will update its outlook if the outcomes aren't reasonable.

Unless the Government is prepared to relax the regime (and to be seen to have done so under pressure) the context for a late-2006 T3 may be even worse than it appears now.

T3 can't occur without a prospectus, which couldn't be prepared without the support and involvement of the company and its directors. They would be reckless if they did not highlight the impact of regulatory decisions and weren't conservative about the outlook for the group. That again argues against the original timetable.

Given its commitment to regulatory toughening, it would be embarrassing for the Government to back down under pressure and allow Telstra to retain the consumer benefit the changes are designed to generate, although Telstra could argue with validity that it is more likely the regime will simply transfer profits from its shareholders to its competitors.

In any event, it is improbable the Government will backtrack.

That leaves the Future Fund. Minchin has indicated that the option of last resort if T3 gets too hard would be to place a large chunk, or even all, of the Government's Telstra holding in the fund Costello established to finance the Commonwealth's currently unfunded superannuation liabilities.

While placing $25 billion of Telstra shares in the fund is

no-one's preferred strategy, it would at least distance the shareholding from the Government and reduce the conflict it experiences as owner and regulator. The fund will have an independent board and, in former Commonwealth Bank chief executive David Murray, a fiercely independent chairman.

Putting the shares in the fund would, at least, defer the point of sale, enable the shares to be parked at arms-length from the Government and pass responsibility for eventually selling down the holding and maximising the proceeds in the hands of professionals distanced from the political process.

It would also be possible to combine the Future Fund option with a variation on T3.

If the Telstra strategy is executed effectively, and this year's earnings represent the nadir for its fortunes, it is conceivable that towards the end of next year the market will be looking through the performance trough.

It might be possible for the Future Fund to issue a convertible security over a sizeable slab of its Telstra shareholding, with a conversion price that would reflect its prospects two or three years out and therefore be at a premium to market. Either Telstra shares would rise over the duration of the securities and make their conversion attractive or the Future Fund would end up with the shares having generated some premium income in the meantime.

It might be uncomfortable for Telstra having David Murray controlling a majority shareholding in the company rather than politicians, who have to keep their distance on operational issues, but that would hardly trouble a Government that already has a fractious relationship with the "new" Telstra.