Telstra’s shadow threatens Telecom

Telecom fears investors will dump its shares when the Australian Government fully privatises Telstra, a move expected by the end of the year.

"Would we be impacted if [the sale] were to go ahead? The answer is there is a risk that we would be viewed as a source of funds for institutions looking to invest" in Telstra, said Geoff Zame, manager of investor relations for Telecom.

The sale of the third tranche of Telstra shares, referred to as T3, is expected to trigger a switch into Telstra and out of Telecom by foreign investors because of Telstra's increased weighting in the S&P/ASX200 index.

About 75 per cent of Telecom is held by foreigners: US investors have 28 per cent, Australians 22 per cent, Britons 17 per cent, Asians 7 per cent, and Europeans 3 per cent.

One analyst said fund managers had a set amount of money to invest in telecommunications companies.

"[If] you've got [an] opportunity to buy Telstra at what you think is an attractive price then, to stop you doubling the size of your exposure to one sector, you might sell related companies to do that," the analyst said.

But it was difficult to estimate what effect the sale of Telstra shares might have on Telecom's share price.

"It's all predicated on what size the [Telstra] offer is going to be, what price it's going to come on at, whether that represents good value or not - no one knows," he said.

"But, in general, it is an enormous amount of stock for the world community investing in telecoms to digest and so you would have thought that all the other telcos in Asia-Pacific are probably going to be affected in the short term."

Either way, the share price would recover over time.

"It doesn't affect the cashflows and, as such, the valuation - so over time you would expect it to rectify. What you are talking about is a technical event."

Fund managers say Telstra could be more appealing than Telecom, depending on the price.

"I'm sure they harbour fears [regarding T3], but those fears will only be realised if T3 is priced at a level at which Telecom looks unattractive relative to Telstra," said Andrew Bascand, portfolio manager at Alliance Capital Management.

The Telstra shares would need to sell for at least a 10 per cent discount over Telecom for investors to make the move, he said.

"There will be a discount - the question is how big will that discount be?"

Bascand said Australians were the most likely key investors to sell because they had typically been investing in Telecom as a proxy for Telstra.

US investors were less likely to make the switch. They would need a Telstra discount of more than 10 per cent, because by the time they sold their Telecom shares, they would have fallen that much anyway.

Telecom yesterday denied a report in the Australian press that executives recently made special visits to woo high-value US investors on top of the company's regularly scheduled post-results trip to the country.

"All we were doing was embarking on our annual US roadshow," said Zame. "We go to the US every year consistently in that format - it wasn't predicated on the T3 issue, as they tended to portray."

Telecom shares dropped to a six-month low earlier this month but have bounced back to $6.02.

- additional reporting Karen Chan