Telstra set for more unsettled weather

It was meant to be a moment in the sun for Sol Trujillo, chief executive of Telstra, the country’s dominant telecommunications company.

Unfortunately, Friday’s marathon strategy presentation – which confirmed Telstra is on track to meet its profit forecast in 2007 – was marred by a faulty fire sprinkler, which left many in the audience drenched and forced a two-hour postponement of the event.

The incident prompted one analyst, lamenting his ruined suit, to suggest that “this pretty much summarises Trujillo’s time at Telstra – every time things get back on track, a new problem comes along.”

Another Telstra surprise is the last thing the Australian government wants, as it publishes on Monday the prospectus for its A$8bn (US$6bn) sale of shares in the company – part of the divestment of its 51.8 per cent stake.

Tensions have been high between Telstra and its majority shareholder in
Canberra, as well as the regulator. The latest spat concerned board nominations, after John Howard, the prime minister, put forward a new candidate who is opposed by Telstra. In a possible reprisal, Mr Howard is considering blocking the reappointment of two other board members favoured by Telstra.

Last night, bankers were trying to bridge the divide as they finalised the prospectus, taking particular care with sections referring to the board and regulatory environment. “We’re getting there and that’s what matters,” said one person involved in the syndicate. “But it certainly hasn’t been fair-weather sailing.”

Still, there are reasons to be optimistic about the offering. The share sale is understood to offer existing investors an attractive entitlement to about one new share for every two held, as well as a 5 per cent price discount when they buy more shares.

A banker close to Telstra also confirmed that the prospectus would include a greenshoe option, as yet unspecified, to allow the government to increase the share sale if demand outstrips supply over the book-building period.

Bankers have been encouraged by a rebound in Telstra’s share price, which closed at A$3.83 on Friday. That compares with A$3.50 six weeks ago, when the government announced the divestment.

Shareholders too can feel more confident after Telstra indicated it would maintain its high dividend of 28 cents per share for an additional year, and maintained its
fiscal 2007 profit forecast.

Beyond that, however, the outlook is less certain. Costs are now expected to rise between 2-3 per cent a year through to 2010, rather than stay flat as forecast last November. Also, Telstra reduced its long-term guidance citing higher costs linked to the abandonment of its planned A$4bn fibre optic network, which it scrapped after a regulatory dispute.

At the same time, however, Mr Trujillo suggested the project might eventually need to be revived, pending further pricing negotiations with the regulator. “We didn’t get there [in our negotiations with the regulator] but perhaps down the road we could figure out a way that makes sense for their purposes and for ours,” he said in an interview with the Financial Times. On Friday, Telstra launched its A$1bn third-generation wireless network.

John Stanhope, Telstra’s chief financial officer, predicted on Sunday that shareholders would not be unsettled by any last minute
revisions to the prospectus or the recent uncertainty over costs. “The market
has already adjusted for those outcomes so that’s why I don’t think it will have a negative impact,”
he said in a television
interview.