Australia | Jan 25 2007
By Greg Peel
Hands up all those who got caught out by the success of T3. You bought some? Well done. The question is what to do now.
With the benefit of hindsight, it would be easy to assume that given institutional underweighting of Telstra (TLS) leading into T3, and the impact its addition would have on index weightings, it must follow that a lot of Telstra buying needed to be done. That seems to have been the case.
Going in to T3, the market was pretty well split on whether the instalments were worth buying or not, dividend notwithstanding. Generally, those brokers involved in the underwriting were pro (with the exception of GSJB Were) and those missing out were anti (with the exception of Credit Suisse). Deutsche Bank went from anti to pro overnight when they picked up a late inclusion.
JP Morgan has never been particularly pro, although the analysts had held a target that has basically come to pass. JPM now believes that the domestic buyers who needed to buy Telstra have, and that international funds will remain underweight given Telstra’s premium to global peers.
There was a truce in place between Telstra and the ACCC while T3 was underway, but now that it’s all over it appears Telstra has wasted little time in going back on the front foot. The telco announced yesterday it would make a constitutional challenge to the ACCC in relation to unconditional local loop (ULL) and line sharing service (LSS) pricing.
The challenge simply highlights the folly of the “is it public, is it private?” nature of the whole Telstra debacle. Telstra is arguing that its fixed network is being compulsorily acquired (in a public kind of way) through ULL without sufficient compensation for shareholders (a private concern). Thus the process violates the constitutional rights of the shareholders, it claims.
Darryl Kerrigan would know exactly how they feel.
JP Morgan does not want to argue constitutional law, but it does point out that proposed ULL and LSS prices are in line with European prices. The analysts also suggest that as the regulatory battles recommences, Telstra shareholders will be losers anyway. This view is very much supported by Merrill Lynch.
There is presently a 4/2/4 B/H/S ratio on Telstra in the FNArena database – a perfectly symmetrical split.
The strong supporters are Credit Suisse, which kept a $4.78 target for a long time while all about them were reducing theirs, and the aforementioned Deutsche. Deutsche has gone from backflip supporter to number one fan, suggesting the telco looks good on every front. It tops the targets with $5.20, while CS has moved to $5.05, convinced the turnaround story is on track.
Those in the middle ground believe the market got a bit ahead of itself in the end, and a pullback is on the cards. The current average target is $4.28, and we closed yesterday at $4.29.
Whoever may prove correct, the one certainty is that a few lawyers will be making some big bucks.