Will the Australian government can its proposed retail offering of shares in Telstra? The telecommunications giant was always going to be a tough sell, and chief executive Sol Trujillo has done his bit to make it tougher still.

Mr Trujillo has issued profit warnings, jeopardised future dividend yields and threatened to pull the plug on investment in a high-speed fibre network unless the government promises regulatory certainty. Prime minister John Howard is refusing to bow to this “blackmail”. But, as Telstra’s share price plummets, so too does the value of the government’s remaining 51.8 per cent stake, now worth about $18bn. The share price has halved since investors bought the 1999 offering

The government, which faces elections in 2007, wants to sell the final tranche this year. That timing looks increasingly tight, especially since Telstra and its regulators have differences to resolve before they can even think of printing prospectuses. Furthermore, markets remain nervous and big upcoming offerings could cause a bout of indigestion. That is an imperfect backdrop for the sale of a telecoms operator that operates in a mature market and trades at a premium to its integrated carrier peers in Europe and Asia.

Canberra has a few other options if it does decide to axe the retail offering. An accelerated book-building would enable it to offload some stock on institutions, and is less time-consuming. The remainder could be decanted into the Future Fund, which was set up to meet future pension liabilities and was due to receive proceeds from the Telstra sale. Getting the fund to agree to selling restrictions for a specific period, however, would be difficult, not to mention inconsistent with its mandate – thus creating a substantial overhang of stock. Alas, the contingency plans look as shaky as the prospect of a successful retail offering.

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