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Even in Australia, where people are famously forthright, there has rarely been a spectacle to match the public brawl between the top management of Telstra, the country’s largest telecoms company and the government of Prime Minister John Howard over the sale of the government’s remaining 51.8 per cent stake.

As accusations and insults fly back and forth and government reports are leaked, Telstra has seen nearly A$9bn (US$6.9bn) wiped off its value in just over two months, while the value of the government’s stake has dropped from nearly A$33bn to less than A$28bn.

In the latest twist, the Australian Securities and Investments Commission, the main corporate regulator, said yesterday it was working with the Australian Stock Exchange to investigate Telstra’s compliance with continuous disclosure obligations after its surprise earnings downgrade on Monday. Telstra said it would co-operate fully with the probe, but insisted it had complied with its obligations.

The earnings warning was just the most recent assault in a full-blown war that Sol Trujillo, Telstra’s forthright American chief executive, has been waging on the government’s regulation plans since he took over in July. Mr Trujillo said Telstra’s profit before interest and tax could fall by as much as 10 per cent in the year to June, due to the rapid erosion of the company’s fixed-line business, competition in the mobile phone market and government regulation plans.

Coming less than a month after Telstra reported a record annual net profit of A$4.4bn and on the eve of the introduction of legislation to parliament to enable the sale of the Telstra stake, the warning drove Telstra’s share price to a two-year low yesterday and prompted banks to downgrade their profit outlooks and share price targets – some lowering forecasts for Telstra’s net profit by as much as 10 per cent, to A$3.7bn for the current year.

After slumping to A$4.26 in intra-day trading yesterday, Telstra’s shares stabilised at A$4.32 in Sydney, well below the A$5.25 the government hopes to achieve in its sale, tentatively scheduled for 2006, and painfully far from the A$7.40 investors paid in the sale of the second tranche of shares in 1999.

With the scheduled announcement of a hefty annual dividend due September 26, some analysts predict many of Telstra’s shareholders, more than two-thirds of them individuals, may sell out after the annual payout.

The big question is why Mr Trujillo and his team seem set on destroying both the company’s share value and relationship with its major shareholder, the government.

“From the market perspective, the key to this whole issue is price – the price at which the government can get its stake away, and the price that impending regulation will extract from Telstra,” said a senior investment banker. “These guys are determined to force the government to back off and the only way to do that is to create a god almighty fuss.”

At stake is the A$30bn-plus the government hopes to gain from its Telstra sale, expected to be one of the world’s largest public offerings next year. For Mr Trujillo, a telco veteran who headed US West and then Orange before landing at Telstra, it is all about transforming a hybrid public-private behemoth into a competitive company, while keeping the advantages of its old status.

He argues that forcing Telstra to provide rivals access to its fixed-line network at reduced prices, enhance rural services and split its operations into wholesale, retail and network businesses, will seriously undermine the company’s ability to generate profits.

Most investors agree. But Mr Howard, mindful of his fractious coalition and its key rural constituency, has promised a fully privatised Telstra would adhere to its so-called universal service obligations. In a rebuke clearly aimed at Mr Trujillo, the prime minister on Tuesday described the conduct of Telstra’s executive team as “disgraceful”, said a spokesman.

The growing ferocity of the clash has shocked investors and bemused bankers working on the sell-off. While reluctant to be quoted by name, senior bankers and fund managers yesterday expressed incredulity at the public nature of the row. and mystification over Mr Trujillo’s real agenda.

Most, however, admitted they were “not overly surprised” at the extent of Telstra’s latest earnings warning – despite the absence in analysts’ reports of clear hints about the rapid deterioration in Telstra’s outlook.

Yet, the company had warned repeatedly of the impact of competition in the mobile market and the fall in its fixed-line business. Mr Trujillo has complained about the effect of regulation plans on profitability since he took over.

One analyst questioned what the revision said about Telstra’s internal systems and forecasting abilities, while a banker asked: “What was happening in there before Sol got into the act? These can’t be new revelations – it is all a little odd.”

Charles McGregor of Moody’s Investors Service, the credit rating agency, said that Telstra “appears to have a strategy” and that the management’s recent pronouncements “seems to form part of this strategy – to ensure the company can sustain profitability over the medium term.” Moody’s yesterday said it was reviewing Tesltra’s A1 senior unsecured ratings for a possible downgrade.

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