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Mon, Aug 14, 2006 - Page 10 News List

Telstra float at risk after profit slump


The multi-billion dollar float of Australian telecoms giant Telstra may be derailed by a profit slump and a spat with government that saw it scrap plans for a new broadband network last week, analysts say.

The public float would raise A$16 billion (US$12 billion), even at Telstra's currently depressed share price, and scrapping it would be a major embarrassment for Prime Minister John Howard's conservative government.

Howard has been keen to fully privatize Telstra since he won office a decade ago, but was stopped by minor parties until he won control of the senate in a 2004 general election.

Restructuring costs

Now the political obstacle to selling the government's remaining 51.8 percent stake in Telstra has been removed, Howard has watched in frustration as other factors have eroded the prized asset's value.

Telstra announced a 26 percent slump in annual profit last week, which it blamed on excessive regulation and the cost of a major restructuring announced last year that includes cutting 12,000 jobs over the next five years.

The company's share price has also gone into freefall, down more than 25 percent since controversial US chief executive Sol Trujillo took over in July last year.

Independent telecoms analyst Paul Budde said Telstra's "disastrous" performance and the row with government had effectively ended the float -- called T3 because it represents the third tranche of Telstra shares on offer.

"Why would investors want to put their money into a company that has just posted a poor profit result and has an equally poor outlook?" he said.

"It is very hard to see that ... T3 is going to proceed according to the original plan," he said.

Budde said Telstra's refusal to guarantee its annual dividend payment of A$0.28 a share cast further doubt on the float, as it left a question mark over a potential lure to investors.

Cabinet decision

With a decision on whether to proceed with the sale expected to be made at a Cabinet meeting today, Howard refused to provide a definitive answer when asked if he expected the float to go ahead despite Telstra's woes.

"We have never said that we are going to sell the shares just for the sake of getting rid of them," Howard said last week.

Communications Minister Helen Coonan went further and declared "we don't have to do a retail offer" -- a major turnaround from last month, when the government insisted plans were on track for a float in October or November.

With that deadline looming, Telstra stock is currently trading at around A$3.80, down from more than A$5 a year ago.

Analysts estimate that every cent the shares drop costs the government A$64 million in foregone revenue from a float.

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