Sydney View: Thinner pickings for Telstra 2 bankers

By GILES PARKINSON*

SYDNEY - The Telstra 2 investors wondering whether their investments will ever get above water may be partly consoled by the fact that merchant bankers looking after the $A16 billion ($20 billion) sale took a haircut as well.

One of the biggest concerns raised by Australia's Auditor-General after Telstra 1 (apart from the fact that the sale was clearly underpriced) was the amount ($A260 million) paid out in banking and legal fees, advertising and marketing costs and logistics.

With a little bit of prompting from the watchdogs, Telstra chief executive Ziggy Switkowski and the task force looking after the sale of Telstra 2 managed to slash the total budget by nearly half - to $A169 million - with most of the savings coming in the form of fees.

The three merchant banks who pulled in a stunning $A91.2 million in Telstra 1 - JB Were, Credit Suisse First Boston and ABN Amro Rothschild - were paid $A34.2 million.

That is a considerable saving, if you think in terms of schools, hospitals and roads, and was brought about by a simple change in procedure: on the recommendation of the Australian Audit Office, the global coordinators were required to negotiate their fees before they signed their contract.

That had not been the case in Telstra 1, where the coordinators haggled with the Government officers for five months during the sale process before they arrived at their fees.

In Telstra 2, according to the national audit report released last week: "The preferred candidates were invited to negotiate a final contract but were told that other firms were standing by if a negotiated outcome could not be reached quickly."

It served to cut the project management fee from the three brokers from $A35.6 million to $A10.5 million.

And the negotiating position had a similar effect on the companies that were competing for the role of business manager and lead managers for the overseas and domestic share sales.

Costs for the international component were reduced by $A20 million, less than half the commission in percentage terms from Telstra 1, while costs for the domestic component were reduced by $A11 million.

The legal firms were similarly touched. Of the seven firms that competed for the contract, the firm that had the role of pre-planning legal adviser was recommended.

"The panel considered that this candidate offered the best value for money for the Commonwealth," the audit report said, adding in its notes: "The successful candidate reduced its proposed fees from $A2.7 million to $A1.9 million following its interview with the panel."

The fees for the accounting adviser were similarly reduced from $A6.2 million in Telstra 1 to $A1.5 million in Telstra 2. Indeed, it seems only the communications adviser (Gavin Anderson Kortlang) enjoyed an increase in fees, receiving $A1.5 million from the second tranche compared to $A1.4 million in the first.

Which goes to show what can be done through improved processes and better negotiating positions. In Telstra 1, the Government paid out $A3.06 million in roadshow expenses. Only $A40,000 of these had been accounted for through independent verification.

There was no accusation of dishonesty but after an investigation by the Audit Office, a total of $A151,468 was recovered from various members of the roadshow group. This included more than $A100,000 in air fares, $A20,000 from the excessive use of private limousines, $A5000 in accommodation and another $A12,000 on unsubstantiated claims including sightseeing and personal expenses.

While the Auditor-General's attentions seemed to have saved the Crown more than $A100 million from Telstra 2, similar sales in the states did not undergo such rigours.

A report from the South Australian Auditor-General into that Government's sale of its electricity assets over the past two years - a process that raised more than $A5 billion - has raised several concerns about the level of commissions and indemnities agreed to by the Government. A total of $A90 million was paid out in sale costs.

* Giles Parkinson is editor of the Australian Financial Review.