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Graeme Samuel, chairman of Australia’s antitrust regulator, likened Telstra’s decision to scrap its flagship broadband project to a “100-metre runner pulling out at the 98-metre mark”.
Investors are wondering whether that comparison could also soon apply to the government of John Howard, who won re-election in October 2004 insisting that selling the state’s remaining 51.8 per cent stake in Telstra, the country’s dominant, telecoms company, was a priority.
Instead, Canberra has repeatedly delayed a final decision, awaiting clarification about Telstra’s regulatory situation and its profits outlook, amid a declining share price that has over the past year erased a fifth of the value of what could still be one of the largest share sales in history.
There are diverging opinions among analysts and bankers about what the government will finally do with a stake worth A$24.5bn (US$18.7bn). Most believe it will stick to its pledge and announce some form of divestment before next year’s federal elections, although hopes for a full retail offering have all but vanished.
There is unanimity in the view that the government will have to show its hand in the coming weeks, following the scrapping of the broadband project on Monday and tomorrow’s publication of Telstra’s first full-year results under Sol Trujillo, who took the reins as chief executive in July 2005.
As Ian Martin, analyst at ABN Amro, pointed out, the planned fibre optic network scrapped this week “was an area of ongoing uncertainty and in a sense they have removed the uncertainty’’.
Tomorrow’s earnings and dividend announcement, meanwhile, “is the missing piece in the puzzle for the government to work out exactly how well Sol is handling Telstra’s problems”, according to one banker.
Telstra has warned that full-year earnings before interest and tax may have fallen by as much as 26 per cent, reflecting a sharp decline in revenues from fixed-line telephony.
The earnings drop could force a cut in the annual dividend, currently worth 28 cents a share, but some analysts argue that the broadband pull-out actually leaves Telstra with more cash to maintain the dividend in the short term. That would certainly be welcomed by Telstra’s 1.6m retail shareholders, many of whom subscribed to the previous two government share sales largely because of the high and steady dividend policy.
“The crucial question is now whether Telstra can confirm the dividend,” said an investment banker close to Telstra. “If it does, that creates a much more favourable climate for the government to go ahead.”
Helen Coonan, the communications minister, said yesterday the government was not committed to a retail offer, was considering several options and “wouldn’t sell Telstra at any price”.
A decision could come as early as next Monday, according to people close to Telstra. Options include a share sale aimed at institutional rather than retail investors, or even the transfer of the government-owned equity to an autonomous national fund which could then sell the stake in smaller tranches.
Some insiders are betting on a combination of the two, with the government selling about a fifth of its 51.8 per cent stake to institutional investors and putting the rest in the so-called Future Fund.
One banker said: “The government has run out of reasons to delay and is going to have to make a decision. I think a fully-registered retail offering is no longer possible, but a broker-firm placement could be.’’
Telstra’s decision to abandon plans to build a fibre optic network took investors by surprise. The broadband project was at the heart of a five-year investment and overhaul strategy unveiled last November in the face of increasing competition from rivals such as Singapore Telecom.
In a note to investors, analysts at Citigroup said the U-turn could turn Australia into “a broadband backwater” and meant Telstra would “need to revisit its strategy and allay market concerns”.
Others suggested the withdrawal showed the project was a Trojan horse for Telstra to secure better regulatory and pricing terms from Mr Samuel, chairman of the Australian Competition and Consumer Commission. Paul Budde, an independent telecoms analyst, said Telstra was developing viable alternatives to a broadband project that was “essentially an attempt to get a regulatory holiday”.
Mr Trujillo will be under pressure tomorrow to spell out how Telstra can boost revenues without its broadband project. Analysts expect it to push ahead with an upgrade of its internet offer via its existing copper network, using more advanced ADSL technology.
Over the past year, Mr Trujillo has rarely seen eye-to-eye with Canberra, even triggering blackmail accusations over regulatory issues.
One thing they appear to have in common is an ability to leave financial markets second-guessing their next move.