Australia's $27 Billion Question
Investment Bankers Hop to Work
On Strategy for Government Sale
Of Stake in Telecom Firm Telstra
By KATE LINEBAUGH and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
February 28, 2005; Page C1
How do you sell US$27 billion of stock in an old-line telecommunications company operating in a small market to global investors hungry for growth? It isn't a joke, or a business-school case study. It is, potentially, the world's biggest stock sale to date.
Australia's plan to sell shares in its former phone monopoly Telstra Corp. poses problems that a clutch of Wall Street investment banks must figure how they might solve by tomorrow. That is when they are scheduled to submit written proposals to win an advisory role in setting up the sale. An adviser will be hired by the end of March to come up with a plan of action.
Roughly a dozen firms -- including ABN Amro NV, Credit Suisse Group's Credit Suisse First Boston, J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley -- are vying for the chance to show the Australian government how to sell its remaining 51.8% stake in Telstra next year, in what is known as a privatization of the company. Investment-banking chiefs have been jetting Down Under to kowtow to government ministers at their homes.
Small wonder: Depending on its structure, the deal could top the US$18.4 billion initial public offering of stock in Japan's NTT Mobile Communications Network Inc. in 1998, the world's single-biggest stock sale to date, according to market-data firm Dealogic.
CSFB and ABN Amro conducted similar share-sale studies for the Australian government in 1997 and 1999, when it sold off a combined 48.2% of the company by issuing public shares. That gave the investment banks the upper hand in the competition to oversee the stock sales, and they wound up as joint lead underwriters for the offerings, which together raised nearly US$24 billion; both rank among the top 10 telecom stock sales, according to Dealogic.
The lead underwriters received fees and commissions totaling US$71.7 million for the first deal and US$35.2 million for the second. For this third and last block of Telstra stock, however, fees may be under more pressure as bankers compete to win what they say is a trophy deal that might be worth more in bragging rights than in actual fees.
Winning the role to devise the sale's strategy, as opposed to the underwriting role, clearly isn't about the cash. In 1999, the bank that did this was paid US$63,000. Still, the competition for the advisory role is fierce, because "if you've done the scoping study, you're in a good position to be one of the lead managers on the sale," says Matt Healy, the national regulatory manager for Telstra competitor Macquarie Telecom Ltd.
The challenge is selling as much as US$27 billion of stock to investors globally without creating a glut and driving down the price of existing shares, which have been depressed in recent years. While the banks involved have signed confidentiality agreements, bankers say the key is to whittle down that great mountain of stock and find ways to make the stock attractive to investors. To do that, they say their proposals could include:
• Having Telstra buy some of the shares from the government.
• Having the government hold back some shares and instead sell bonds that could be exchanged for Telstra stock if the shares rise in price. One banker suggests an exchangeable bond would attract investors who might not be interested in buying regular stock, though the government could wind up owning the stock if bond holders don't make the exchange.
• Discounting the share price for individual Australian investors, who will be relied on to take up a fair chunk of the sale.
• Allowing investors to buy some stock on an installment plan, as was done in the previous sales. That demands less cash upfront but gives investors a full dividend at the start. The question is what portion should be paid for initially and when the rest should come due.
Goldman Sachs, an underwriter in nine of the 10 biggest stock sales to date, may have an edge after its 2003 acquisition of a stake in the country's oldest brokerage firm, JB Were. ABN Amro, J.P. Morgan and local Macquarie Bank boast domestic operations too. Morgan Stanley, which lacks a strong Australian presence, has teamed up with local Commonwealth Securities Ltd.
Government officials decline to comment on which investment banks might grab pieces of the deal.
The sale has been a long time in coming as politicians with rural constituents, fearful of being ill-served by a Telstra that has to answer to investors, have opposed a privatization. Prime Minister John Howard's electoral victory in October cleared the way, and when Mr. Howard's party and its allies take control of the Senate in July, the legislative go-ahead is all but assured.
Telstra itself is both a selling point and detraction. Australia's No. 1 landline and mobile-phone operator is also dominant in broadband and is a big competitor in cable television. Earlier this month, Telstra said fiscal first-half earnings rose 1.9% in the six months ended Dec. 31 from a year earlier, on growth in the company's cellular operations, while revenue rose 5%. The report marked the first time Telstra's overall market share has held steady since telecom competition was introduced in Australia more than a decade ago. Market share is now about 60%.
But the company's strongest future growth is expected to spring from cost savings rather than revenue, most of which comes from its traditional fixed-line phone business. Under Chief Executive Ziggy Switkowski, who will leave the company by July 1 due to differences with the board, Telstra has hemorrhaged cash from investments such as an undersea-cable joint venture with Hong Kong's PCCW Ltd., which Telstra wrote down to zero in 2003 at a loss of US$759 million.
While Telstra's stock has underperformed Australia's benchmark index over the past 12 months, it is up 7.5% this year, compared with a 2% gain in the benchmark. And while a rising stock price may bring in more money for the government, it could make Telstra a harder sell. Investors say the company may be too pricey compared with global peers in bigger markets -- Australia has just 20 million people. Telstra trades at 15 times its forecast 2005 earnings, compared with ratios of 11 for France Télécom SA and 14 for Verizon Communications Inc. of the U.S.
Telstra's stock nevertheless is about a third below the 1999 offering price of $7.80 Australian dollars (US$6.14 at current exchange rates) a share, something many investors in that US$10.35 billion sale haven't forgotten and may make asking them to take a new bet on the company a hard sell. At current conversion rates, the deal would be valued at about US$12.6 billion.
"A lot of small investors who are Australian taxpayers and voters have lost their shirts," says Robin Simpson, a telecom analyst at Gartner Inc. in Sydney.
Write to Kate Linebaugh at kate.linebaugh@wsj.com3 and Rebecca Buckman at rebecca.buckman@wsj.com4
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