Money: It's time to pay, big Aussie tells punters

As deals go, it's not one of the great ones - Telstra shares, worth $8.30, yours for just $9.78.

That's the reality facing close to 20,000 New Zealanders who dived into Telstra about this time last year.

Back then they only had to make a partial payment up front. Now the letters are going out demanding the rest of the cash and there's a question to answer: is it good money after bad, or just the price of being in the market?

There's not a lot of time to decide. If you want out, you should act in the next week or so. If you're resigned to paying, you've got to find the money by the begining of next month.

But first, a little history.

Last October, Australia's Federal Government sold a sixth of telecommunications giant Telstra, having already sold a third of the company in 1997.

Rather than charge full price for shares in the company, it offered investors "instalment receipts" - a way of buying shares on time payment.

Each receipt cost $A4.50 up front, with investors promising to pay another $A3.05 on November 2 this year to convert them into Telstra shares.

It looked like a good deal. For $A7.55 you could buy a share that many Australian brokers reckoned was worth $A8.50 to $A9. You had to pay only part of the money, effectively got an interest-free loan for the second instalment, and were entitled to the full Telstra dividend in the meantime.

Such subleties probably weren't the issue for many investors. The original Telstra sale produced instant windfall gains and many who bought into the second sale - widely referred to as Telstra2 - hoped for a repeat performance.

Those hopes evaporated when the instalment receipts hit the market last October 18. On the New Zealand market, instalment receipts which had cost $5.70 in our dollars ended their first day's trading at $5.80, hardly the big gain that many had hoped for.

Things did get better for a while, with the instalment receipts hitting $7.62 on the New Zealand market late last year, and trading above their issue price for most of the first quarter of this year.

Since then, though, it's been all downhill. As of yesterday the instalment receipts were trading at $4.32 locally, a loss of 24 per cent on their original price.

If these were shares, you could do nothing and hope for better days ahead. But because they are instalment receipts, Telstra2 investors don't have that luxury - the second payment has to be made by November 2.

Which raises a question. Why pay $9.78 (the original $5.70 plus a further $4.08 to make the $A3.05 second instalment, at current exchange rates) to buy Telstra shares which yesterday finished trading at only $8.30?

One answer is that was the deal you made. Your choice now is to front up with the extra cash or sell the receipts, in which case you will be turning your paper loss into a real one (see 'Pay up or hang up?' below).

Another way of answering the question is to ask why you bought into Telstra2 in the first place, says Arthur Lim of brokers Ord Minnett.

"If they [investors] bought in for a trade, one would assume that they would have been out by now," he says, pointing out that the instalment receipts could have been sold for around $6.30 to $6.40 for much of the early part of this year.

If investors didn't sell at that kind of level, he says, "why would they look at selling out now ... it doesn't make sense to me."

"If they bought in because it is a good long-term investment for them, then there's no reason why they shouldn't be putting up the second instalment and riding out the fluctuations in the markets.

"But certainly if investors don't want to pay the second instalment, we would say they have to sell up now before October 16. After that, the instalments stop trading."

It's much the same story from Murray Birkett, manager, advisory services, with brokers Craig and Co.

"If you are in it for the long haul you've got to pay up," he says.

Craig & Co has sent its clients a letter saying it is concerned that some are disappointed in Telstra2 and may overlook the need to either "cash up or front up."

"While the telecoms sector has come off its recent highs, there are still very good prospects within that sector and Telstra is one of the companies that has good prospects," says Mr Birkett.

"As such, investors should be looking to the long term and paying their instalments."

Steve Ellis of brokers Ellis Bros says a call for more cash at a time a share is under-performing often depresses the price further.

However, he's hoping that passes once the receipts have been converted into shares.

"I'm encouraging even those with a short-term type of time horizon, those who want out over the next six months, I'm saying take them up, there'll be a better exit level later," says Mr Ellis - all assuming that there are no nasty surprises from Telstra between now and the time you want to sell.

Whakatane broker Brent Sheather takes a different approach.

Before sticking with Telstra, he says, investors should ask why they think a telecommunications company is likely to out-perform the market as a whole.

If he was going to keep his money invested, he says, he would rather sell the receipts and put the money into a managed fund.

But, says Mr Sheather, "if I was going to take my money out of the market I'd be inclined to front up with the money and sell when this call is over."

To contact Personal Finance Editor Mark Fryer write to: Weekend Business, PO Box 32, Auckland.

Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423. e-mail: markfryer@herald.co.nz