Government should be prepared to wait on T3, analysts say

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Government should be prepared to wait on T3, analysts say

By Alan Wood

SYDNEY, Aug 16 AAP - A further government inquiry into rural Telstra services pointsto a third tranche sale next year, but there's no need to rush T3, according to analysts.

They believe the federal government should wait until the current market negativitysurrounding the telecommunications sector dissipates so that it achieves a better pricefor the third tranche T3 shares.

Communications Minister Richard Alston today announced a second inquiry into ruraland regional telecommunications, opening the door to the sale of the remaining 50.1 percent of Telstra.

The inquiry would look to answer any fears consumers have about services sufferingunder full privatisation.

But in the meantime, potential investors remain cautious in a time of global telcosector uncertainty.

Telco analyst Paul Budde said the longer the government removed the sale from currenttelco industry unrest and consolidation, the better.

"The longer we wait, the higher the price will be ... if we get out of this internationaltelco crisis, and that's going to take at least another 12-18 months," Mr Budde said.

He said the key issue for the rural sector was not telephone services but the provisionof fast internet services and the "information highway" in rural Australia.

"It means that some money - $5 billion plus - will need to be set aside over the nextfive years to upgrade the rural and regional network," he said.

Analysts agreed that any third tranche sale would not happen until mid-to-late 2003,given that the government faced significant hurdles in passing the legislation in theSenate, and because of the requirement for better rural services.

Telstra chief executive Ziggy Switkowski said today additional improvements were currentlyin the pipeline.

Shaw Stockbroking research director Scott Marshall said influencing the float price,and therefore other Telstra shares, would be a number of key factors.

These included the nature and management of the T3 bookbuild to institutional investors.

"There's a few things involved there - how much is institutional, how much is Australianfor instance," he said.

Treasurer Peter Costello yesterday guaranteed Telstra would remain Australian owned.

Under current legislation, foreign investors together cannot hold more than 35 percent of Telstra shares not held by the government.

Mr Marshall said another influence on the share price would be any split of the government'sremaining stake in terms of further tranches and whether shares would be offered via instalment.

Both the government's T1 and T2 offerings of shares were sold in instalments, meaninginvestors paid a smaller amount initially although having to pay the full amount eventually.

For example investors paid $4.50 for their T2 first instalment, and could trade theinstalment shares before making a final payment of $2.90 in November 2000.

Mr Marshall said while the government would lose control of Telstra in terms of ownershipit would put further regulatory controls in place to balance that.

The merchant banks appointed to help with the sale will also be of influence, withMr Marshall noting key analysts had moved to different institutions within the past yearin anticipation of helping win the role of adviser.

Another analyst said there also remained a management issue at Telstra, given the companyhad failed to generate significant earnings growth in recent quarters and that investmentin Asia had "occurred at a cost".

"I think people will be fairly cautious about Telstra unless it's priced extremelywell because everyone has had their fingers burnt already," he said.

The government twice has sold tranches of Telstra in 1997 and 1999 and wants to sellthe rest of the company. At current share price levels, that could raise about $30-$35billion.

T2 was sold at $7.40 a share leaving investors in the second tranche facing paper lossesof 33.64 per cent at current prices.

At 1333 AEST Telstra shares were trading at $4.91, up one cent from yesterday's closing price.

AAP aw/sh

KEYWORD: TELSTRA MARKETS