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August 26, 2005 1:03 pm

Search begins for banks to manage Telstra sale

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The Australian government will on Saturday begin the formal process of appointing investment banks and brokers to oversee the A$30bn-plus sale of its remaining 51.8 per cent stake in Telstra, Australia’s main telephone company. 

However, despite the removal this week of the main political obstacle to full Telstra privatisation - after a rebel senator in parliament’s upper house dropped his threat to block Telstra sale legislation - the government admitted the sale of its entire stake was not  assured until parliament approved the plan.

In a structure that would ensure unusually broad  participation of  investment banks with significant presence in Australia - and upwards of A$70m in fees - the government, through online and newspaper advertisements  appearing on Saturday, is inviting banks to apply for roles as joint global co-ordinators of the sale, known as T3.

The banks that miss out on that role will be considered for membership of a panel to sell Telstra stock to domestic and international institutional investors and, if the sale proceeds, considered for appointment to specific selling roles.

Among investment banks well placed to win key co-ordinating roles are UBS, which carried out a scoping study for T3 and was, along with Caliburn Partnership, an Australian corporate adviser, appointed by the government in March to evaluate its Telstra sale plan.

Others include ABN Amro Rothschild, which was one of the main arrangers of the government’s previous two Telstra offerings; Goldman Sachs and Macquarie Bank.

Citigroup, Deutsche Bank and JPMorgan were also being tipped by bankers familiar with the government’s thinking as possible candidates for key co-ordinating roles.

Most candidate banks have teams that were involved in the previous two Telstra offerings, in 1997 and 1999.

Nick Minchin, Australian finance minister, said in a statement on Friday that the appointment of investment banks did not mean the government was bound to proceed with full Telstra privatisation. "It is important to note these appointments do not pre-empt parliamentary consideration of the sale bill, as they can be terminated if the government does not proceed with a sale," he warned.

Nevertheless, the “ideal window” for a possible sale would be October or November 2006, he added. The first two tranches of Telstra were sold in the same period in 1997 and 1999. Legislation to enable the final Telstra sale will only be introduced in parliament next month, but in order to achieve a sale in the desired time-frame, “we need to start the process of appointing JGCs [joint global co-ordinators] immediately,” Mr Minchin said.

The long slide in Telstra’s share price and uncertainty over parliamentary approval for the sale ensure the banks will have to work for their fees - if the sale proceeds in entirety or even partially. Even then, the government may not achieve the $5.25 share price it is hoping for from the sale, which could also affect the level of fees the banks can expect to earn.

Telstra’s share price has fallen nearly 5 per cent in the past two weeks to A$4.74 , well behind the $7.40 most investors paid for the government’s second tranche of stock in 1999. In the initial float in 1997, most retail investors paid $3.30.

The share price performance, coupled with investor concerns about political pressure on the government to tighten Telstra’s basic service obligations to rural communities, is likely to affect domestic and particularly foreign appetite for the stock.

Tacitly acknowledging the inevitability of weak overseas demand for T3 shares, the government  announced earlier this week it would maintain the 35 per cent cap on foreign ownership, although foreign holdings of  Telstra are little more than 6 per cent.

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