European Peers Might Support T3 SaleFN Arena News - September 27...

European Peers Might Support T3 Sale
FN Arena News - September 27 2006

By Rudi Filapek-Vandyck

Some experts in the market have already suggested that T3 is likely to become more an affair of fund managers and other professional investors with mum and dad investors expected to remain cautious because of the negative T2 experience.

If this expectation proves to be true than one of the key factors behind a successful $8bn sale of Telstra (TLS) shares might well be the valuation of the company's international peers. So far investors worldwide have treated telcos in general rather poorly. Of course, the T3 sales teams of ABN Amro Rothschild, GSJB Were and UBS will no doubt try the sales pitch that Telstra's more than generous dividend in the first year should command a premium to the rest of the sector, but it always remains an open question whether those who are expected to throw in the money are willing to buy into this appeal.

A recent report by the European telecommunication specialists at Lehman Brothers suggests the sector may well regain investors' attention in the short term and so push up valuations of what currently looks like a graveyard of once promising new techno-era hopefuls.

Lehman Brothers only has a small representation in Australia and is not connected to the upcoming T3 process. Its telecommunication analysts in Europe have been bullish about the sector over there for a while now, citing low valuations as their key motivator. On the team's estimates, European telcos are now offering a 5% dividend yield, which is half a percentage point above the previous sector peak of 4.5% in the early nineties.

Probably of even higher importance is that the sector, relative to the rest of the market, is now offering its largest dividend premium ever at 2%. Lehman believes the sector will be able to grow its dividend by (low) single digits over the next two years at least.

Lehman acknowledges investors looking for growth should not look at these stocks, but how high can dividend premiums run further from here?

The team sticks to its sector Overweight call, as in its opinion the odds are now in favour of the sector bouncing back on investors' radar in the medium term. All it takes is a trigger, with the report suggesting "the sector will respond asymmetrically to incoming news flow" as well as "we believe the sector will react very positively to any sense that the pace of downgrades is beginning to stabilise".

If Lehman is correct, all this might happen just in time to draw enough attention to the Telstra share offering to make T3 a success. It might.