From bad to worse

10 May 2006

Telstra Corp is facing continued pressure from regulators, competitors and the stock market in the run-up to an early May decision by majority shareholder, the Australian Government, on whether the A$23 billion ($17.1 billion ) sale of its remaining stake in the company will be sold.

As Telstra shares recently hit a record low of A$3.62 ($2.69) on an Australian share market, which continues to enjoy record highs, Communications Minister Helen Coonan confirmed the government would decide on May 8, the day before the federal budget is announced, whether the Telstra sale, known as T3, will go ahead.

Telstra shares were sold in the second tranche T2 sale for A$7.40 in 1999 and are valued on the government's books at A$4.13. Treasurer Peter Costello, in a moment of candor, recently described the telco as a 'shocking investment' for the government.

If the Government decides not to proceed with T3, it could opt to 'park' its stake in its new Future Fund, created to fund ongoing pension liabilities of public servants. Proceeds from the T3 sale have been earmarked for this fund.

Hanging over Telstra and souring market perceptions is its ongoing battle with the regulator, the Australian Competition and Consumer Commission (ACCC), over the wholesale fees it charges competitors to use its copper wire network.

The ACCC has taken the unusual step of slapping a competition notice on Telstra over recent fee rises, which the company has defended as 'reasonable.'

The impasse has cast doubt on Telstra's plans for a multibillion dollar fiber upgrade of its copper network and has undermined the confidence of institutional investors ahead of the T3 sale.

Telstra CFO John Stanhope recently returned from a US and European roadshow to market T3, and said there was 'no interest' in the sale 'unless there is regulatory certainty.'

Meanwhile, SingTel-owned rival Optus has launched legal action against Telstra over the increases in wholesale prices for access to its fixed-line network.

Optus may seek more than A$20 million in damages from Telstra over the move, under which it now charges competitors more for fixed-line rental than it does its own retail customers.

Optus corporate and regulatory affairs chief Paul Fletcher has described the legal action as an 'open and shut case' against 'blatantly anti-competitive behavior' from Telstra.

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