October 19, 2006 | Graham

Telstra sale strategy unethical

Just as with T2 the federal government is requiring investors to borrow money to get into the stock. Not only is it mandatory but they are targetting the bulk of the sale at small shareholders, and then allowing salesmen to use the gearing to disingenuously claim that the investment will yield a 14% dividend in the first year. This article has most of the elements in it, apart from a fair-dinkum analysis of the terms of the sale – http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2006-10-11T075159Z_01_SYD37881_RTRIDST_0_TELECOMS-AUSTRALIA-TELSTRA.XML.
Don’t get me wrong: Telstra ought to be sold-off, but on terms that are straight up and down.
The way the basics of the government deal work are that you pay $2.00 now and an additional unspecified amount, but probably somewhere around $1.50, in 18 months time. This is what is called vendor finance. You owe the government the balance, and just like any other loan it has to be paid. It is a leveraged investment, and it is not appropriate for the small investor market.
The fact that you are geared around 62.5% means that the return on your deposit is artificially inflated and you are disproportionately exposed to pricing risk. As most institutional investors will be short of the stock, the price risk is minimal because they will be buyers after the float, but it is there, and a small movement in price could easily wipe-out the super dividend.
Unlike T2 this sale is being made at the bottom end of the market for Telstra stock, for which investors can thank Sol Trujillo, so there is unlikely to be the same amount of grief. Indeed, I bet some share salesmen are spruiking the benefits to T2 shareholders on the mathematically dubious basis of “averaging down”, which is somehow supposed to make the first loss palatable.
However, a proper analysis of this proposition might well conclude that if you want to boost your returns from the sector and recover your first loss, you would be better-off putting your money into another Telco – the Reuters article has a side panel with some interesting ratios which show the Telstra P/E as being lower than the average for the sector, but growth in earnings also being lower.
Of course, in other government sell-offs, the release of the dead hand of government has allowed the company to take risks and prosper – CSL being the classic example. In this case that probably won’t happen. Without a reduced interest in propping up the share price, the government will be most likely to lean on Telstra to squeeze service prices. Not a situation likely to lead to sales growth picking up.
For me the most stunning thing about this Telstra sale is that while there was a queue of critics before the terms were announced, just about everyone has hunkered down to back the establishment line. Doesn’t say much for finance journalism in the country.

Posted by Graham at 11:18 pm | Comments (4) |
Filed under: Australian Politics


  1. Graham,
    Nice analysis. Good to see someone drilling down into this. I have put up my own critiques of the T3 process at:

    Comment by James Wheeldon — October 20, 2006 @ 12:51 am

  2. Hi Graham,
    Sorry to go OT but just letting you know that Catallaxy is back on deck after our server crash last week. Address is http://catallaxyfiles.com/

    Comment by skepticlawyer — October 20, 2006 @ 12:52 pm

  3. Graham, very revealing and inciteful. Have you noticed that the share float of T3 is following the precedent set by the spectacular failure of Australian Magnesium Corp (costing the Qld Government and mums and dads hundreds of millions) and more recently, that of Rivercity Motorway to partly fund the North South Bypass Tunel in Brisbane. This too failed to attract confidence, with Terry McCrann giving it the kiss of death in the AFR. Seems the dodgy floats of late have deferred payments with almost immediate dividend payouts. At least the RCM share sell off used the additional enticer of a pathetically weak concession on tolls. No wonder RCM is trading at 20% below list price!

    Comment by Justin Wells — October 20, 2006 @ 10:28 pm

  4. Dear Graham since when hae truth or ethics ever bothered this Govt,this Govt and the gentleman who control it could not lie straight in bed.

    Comment by John Ryan — October 23, 2006 @ 10:06 am

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