The T3 float offers investors more than one way to get on board. One option, which is usually restricted to institutions, is for private investors to join the “book build” that precedes the float. No doubt many readers have been burnt investing in the giant telco, but this is certainly a case of past performance offering no guide to future returns. Investors should put their prejudices to one side with Telstra and give it another look. Analysts have been calling the Telstra “bottom” for some time: Credit Suisse regards the market as being overly negative; Deutsche Bank has upgraded it from a hold to a buy; a report from boutique funds manager Roger Montgomery states that “only now are price and value approaching a meaningful relationship”. Just recently, Telstra has recently committed to a dividend of 28˘ for 2006-07, delivering a yield of around 8%. Alan Kohler outlined another fundamental reason for buying Telstra in Eureka Report on August 28. He reasoned that underweight institutions will be forced to buy Telstra in the lead-up to the offer in order to ensure that they are entitled to enter the float. When T3 enters the market, Telstra will go from making up 2.25% of the ASX 200, to 3.1%. Institutions will try to rebalance their portfolios to reflect this change, pushing the price up. So how best way to get on board T3? By purchasing on market you’ll pay brokerage fees of anything up to 0.5%; joining the float will incur no such fees. There are three ways you can go about doing this the best way to do it will depend on your circumstances. Potentially the most profitable way to get into T3 is through the book build, but this involves the biggest outlay and usually only institutions can afford to do it. In the book build, which works a bit like a silent auction, institutions are given a range of values and asked to nominate how many shares they want for themselves and at what price. Wealthy individuals can approach broking houses directly and ask to have “broker sponsored bid” submitted on their behalf. The broking houses will then gather all the requests of this type, set the bid price, and present them as a single bid alongside their own during the book build. The risk you take is that the amount allocated to broker sponsored bids is historically very low. You may not end up receiving the full amount of shares that you request. You will, however, have some control over how much you pay, which is a benefit afforded to very few investors. The 'broker firm' stage Another possibility is to enter in what is called the “broker firm” stage. In the lead-up to the offer opening, brokers contact their best clients to ascertain whether they require an offer document (which contains offer details and an application form) and how many shares they want. The broker then commits to taking an amount of shares on behalf of their clients. When T2 was floated in 1999, the number of shares requested by broker firms exceeded the total value of the $16.6 billion float by $332 million. This request, of course, just couldn’t be filled. Broker firms for T2 eventually accounted for just over 20% of the total float, or $3.2 billion of the $11 billion sold to retail investors. If you don’t have a relationship with a broker, don’t despair. Once the offer has been launched there will be a period of about two weeks in which you will be able to register your interest in the offer. Sources close to the float have tipped October 9 as the date for the launch. Once you have registered, an offer document will be sent to you. This will contain the nitty gritty details of the offer including a price, details of whether or not installments are to be paid and the financial details of the company. Additionally, it will contain information about the offer for Telstra employees. In T2, for example, Telstra’s 46,000 employees were offered interest-free loans to purchase up to 400 shares each. It’s important to consider your own particular circumstances when evaluating each of these methods. If you are what we call a “high net worth individual” (that is, a millionaire) then it is very likely that you will be in regular contact with a broker. Your relationship and business is likely to be rewarded by the broker putting your request into the book build, where you can enter at the same price as the institutions. You will most likely need to submit an order of at least $700,000. This is based on the T2 experience, in which you needed to buy more than 100,000 shares to be included in the book build. If you bear in mind that T2 was trading for $7.40, then it would be safe to assume at current levels, where it is trading for around half that, you would need to purchase about twice as many shares. If you operate a DIY fund and believe T3 looks right for you, then you might benefit from contacting your broker to join the broker firm stage. If you are what might be called a “mum-and-dad” investor and only chasing a relatively small number of shares, the retail offer would be your best course. Regardless of which method you choose, you will need to be comfortable with an investment in T3 before you begin to plan just how you will go about it. Our view at Eureka Report is that T3 is worth buying at these levels. The declines in revenues from PTSN networks (regular telephone networks) have done just about all the damage they can. At the current prices of $3.55, Telstra has a price/earnings (P/E) multiple of about 14. In 1999 it was closer to 30. To put this in perspective, the big four banks enjoy P/Es of about 15.5. Technology companies usually sit somewhere in the stratosphere, with multiples of 40 and more. Telstra’s renewed focus on content and “high calorie” customers is strategically sound. In a sustained and much anticipated price war, Telstra is the only telco that could survive. While the business clearly has many problems, its does have a lot going for it, namely great network assets and a strong brand. With sources close to the float saying that the first installment will be a nice round figure like $2 and a good sized dividend of 28˘, then T3 will be a good investment for investors looking for income. Whether investors are ready to pony up for another ride on Telstra, will largely depend on whether or not they trust those holding the reins. |
Investors’ T3 options ::