NOW that the federal Government has given the nod to the buyout of Qantas by private equity players, the prospect of a tilt by similar groups at the other national "carrier", Telstra, must now be firmly on the cards. In only two months David Murray's Future Fund will be free to sell some, or all, of its 17 per cent stake in Telstra, thus paving the way for a full bid for the telecommunications giant.
Telstra has the two main features that private equity loves: very strong cash flows and low gearing.
In a break-up scenario, some suggest that as a telco, geared to the hilt and split into bits, Telstra may be worth as much as $90 billion, or more than $7 a share.
While this seems a little steep, a valuation of $6 or more can probably be reached without much difficulty.
Under the rules passed into legislation as part of the T3 sales last November, the Future Fund cannot sell its shares in Telstra on the stock market for two years after the sale, in November 2008.
But there is is an exception -- and this is where the privateers come in: any time after May (six months after T3), Murray is allowed to sell 3 per cent or more of Telstra to a so-called cornerstone investor.
This means such an investor, which could well be one of the big private equity firms, could grab up to 17 per cent of Telstra by cutting a deal with Murray. It could then add to that stake and take up to 19.9 per cent of the company in preparation for a takeover bid.
In many ways Qantas and Telstra are in a similar situation. Both have been undergoing fundamental restructuring, or transformation programs, which include cutting staff and outsourcing key information technology functions. Like Qantas chief executive Geoff Dixon before the Airline Partners bid, Sol Trujillo is making good progress cleaning up Telstra's bureaucracies and systems and trimming the fat.
Like Qantas, Telstra is ripe for break-up in the eyes of some.
At most, Qantas may spin off its low-budget subsidiary Jetstar, its catering business and a few other bits and pieces.
Telstra, on the other hand, has a number of sizeable divisions that are ready-made for selling or spinning off.
This is where private equity financial engineers believe they can reap value from the company.
The quickest and easiest way to realise value from Telstra is to sell of its Sensis directories business. Such businesses are extremely popular among private equity groups, with four of them in the final round for the Telecom New Zealand directories business, which is now on the block.
Numbers bandied about for the TNZ business are as high as a price-earnings ratio of 14. Applying such a number to Sensis would give a value of up to $16 billion.
The next easiest bit of Telstra to sell would be its 50 per cent share in Foxtel, the metropolitan pay-TV monopoly 25 per cent owned by The Australian's publisher, News Limited. Foxtel, now profitable and poised for decent growth after more than a decade, could be worth up to $4 billion, or $2 billion for Telstra's half.
Telstra also has the country's biggest mobile phone business, with revenues approaching $8 billion, if it gets its margins back to 40 per cent. This leaves earnings at $3 billion. At seven times PE, there's another $20 billion.
Telstra may want to keep a stake in mobiles to maintain control as fixed and mobile broadband services continue to converge. This means a market float of mobiles may be the best option.
There are a number of options with the core fixed-line business.
The networks business could be floated off as a Macquarie Bank-type infrastructure vehicle, a monopoly utility throwing off regular returns. The benefit of this would be to ring-fence the part of the network that attracts the ardent attention of regulators, leaving the other parts of the business to do their own thing. Such a move would leave a healthy fixed-line retail business which could be run as Australia's dominant telco service provider.
Alternatively, these two arms could be left together.
Trujillo's track record shows he will sell out to get the best price, as he did when he sold US West at the height of the tech boom, and he would not be averse to another personal windfall.
As with the Qantas deal, Telstra senior management would walk away with hundred of millions of dollars between them, and in the bargain could run the company harder.
Of course there are realpolitik reasons why none of this may come to pass.
Qantas chairman Margaret Jackson and Dixon have done a textbook job with government relations and lobbying over the years, laying the groundwork for a painless, and short, review of the Airline Partners deal.
In stark contrast, Trujillo and his minions have done quite the opposite: they have rewritten the book on how not to deal with government, upsetting almost every member of federal Cabinet from the Prime Minister down.
Still, if shareholders are offered over $6 for their Telstra shares, a level not seen since June 2001, and the Australian ownership limit of 35 per cent is not breached, how can the Government, to all appearances a supporter of the free market, possibly say no?
(20min delay)