Don't bank on massive windfall from second Telstra share offering

By Giles Parkinson

Sydney View


The Australian Government is about to raise $16 billion from the sale of another tranche in Telstra Corp, but the task will prove more problematic than the first public offering.

The Government, and in particular Finance Minister John Fahey, will tread a fine line over the next two months between expectation of another windfall and their fiduciary duties to the wider community.

The public offering needs to be attractive, but it cannot be another giveaway.

Two years after the float of Telstra 1, more than 1.8 million investors are still marvelling at the ability of a share certificate to increase their personal wealth so dramatically.

The Telstra shares they bought over two instalments for $3.30 in 1997 have been worth as much as $9.20 and are still trading above $8. Many of these investors will be coming back for a second bite and are already queuing for more, anticipating yet another Government-sponsored windfall.

They may be disappointed.

Telstra 2 is a different animal to the one that was privatised two years ago. The company's existing stock is one of the most expensive telco stocks in the world and Mr Fahey and his advisers have to juggle the needs and desires of expectant retail investors, professional fund managers and overseas institutions.

Already the Government has been quick to play down hopes of a big stag profit when the second 16.6 per cent tranche comes on to the market in October, but it has been vague about what sort of enticements will be offered. And there will have to be some.

But it is under a lot of pressure from fund managers to scrap the deeper discount for retail investors. The fund managers argue that they invest the funds of many more small investors and to be denied the same discount would penalise these people.

The Government has announced a one-for-five pro rata entitlement for existing shareholders. One argument is that their loyalty should be rewarded more, while others suggest the huge windfall they received from the first sale should be enough.

Finding a proper valuation for Telstra is proving as difficult as it did the first time round, when all the Government's advisers and every market analyst got it so comprehensively wrong.

What is clear now is that at more that 30 times expected earnings, the stock is one of the most expensive of its type in the world, notwithstanding the recent claims by its aggressive head of convergent business, Ted Pretty, that Telstra should no longer be viewed as a telco stock.

Mr Pretty has been in charge of Telstra's drive into the internet and associated areas, and has been the author of its investments and deals in and with such companies as Computershare, Solution 6, Sausage Software and Walhalla.com.

But do not go pricing Telstra shares on internet valuations just yet.

Major telco stocks these days are being valued on future growth, and with Telstra's profits predicted by many in the broking community to surge to more than $4.5 billion in 2000-2001, its share price/earnings ratio is a more modest 24 times anticipated earnings.

Telstra is expected by some to continue growing at a compound rate of at least 15 per cent over the next five years as data traffic grows exponentially and Telstra leverages off its installed customer base.

Even though it has just lost the last of its monopolies - the Australian Competition and Consumer Commission has ruled it must give its rivals access to its local network and the $5 billion local call market - Telstra's revenues are widely enough spread for this to be a mere blip on its screen.

Because of its high pricing compared to its international peers, overseas fund managers may take some convincing to pick up big lines of stock. But local institutions will be falling over themselves in the rush for scrip.

Even if they do not think it is such a great deal, they have to have the stock because the company will become Australia's biggest stock by market capitalisation and will get full weighting under the ASX indices.

Telstra may well be ignored by many investors looking for a quick killing in the market, but there will also be plenty of demand from those investors who look for a solid, long-term investment.

In fact, it is generally expected that the average share allocation this time round will be much larger than in Telstra 1.

And, in the end, the Howard Government is likely to err on the side of caution. It is a lot easier to explain to people why their investment went up rather than why it went down.

* Giles Parkinson is deputy editor of the Australian Financial Review.