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telstra could buy a third of itself

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    Telstra could buy a third of itself
    Kaaren Morrissey
    JANUARY 26, 2005

    TELSTRA could use its undergeared balance sheet to buy out around one third of the federal government's stake and raise its share price ahead of its proposed full privatisation, a global financial services group said.

    The government holds 51.8 per cent of Telstra - an equity holding worth around $30 billion - and is mulling the best and most profitable way to offload the stake ahead of an anticipated public sell down in late 2006 or early 2007.
    The local broking arm of Switzerland's UBS yesterday said Telstra has the capacity to raise debt and buy back some of the government's equity thereby reducing the number of shares eventually offered to the public.

    Its hypothetical analysis suggests that if Telstra bought back around $10 billion, the value of the stock would increase.

    The company's implied fiscal 2007 share price could rise from $5.30 per share to $5.70 - a gain of 40 cents per share, and a rise of nearly $1 from the current price.

    If it bought back only $8 billion worth, the implied share price would rise to $5.60.

    Telstra shares today closed up one cent at $4.86, valuing its listed equity at around $29 billion.

    UBS also said that even though such a deal would likely cut Telstra's A-plus (S&P) and A1 (Moody's) long term credit ratings, it would still be in line with its peers.

    "We believe that Telstra could achieve this and only see its credit rating fall by one to two notches from its current A-plus/A1 rating," UBS analysts said in a research note.

    "While a buy back of up to $10 billion without losing its single A credit rating is possible, we believe the company is unlikely to extend beyond $8 billion."

    UBS said that a $10 billion-plus re-gearing of the Telstra balance sheet could see the company's long term credit ratings cut to A-minus/A3.

    An $8 billion raising would lower the ratings to A/A2. But even with a $10 billion buy back, Telstra's gearing ratios would not be onerous, UBS said.

    Gross interest cover would fall to 7.4 per cent, from a current 14.1 per cent, while gross debt to earnings before interest, tax, depreciation and amortisation would rise to two per cent from 1.1 per cent.

    UBS said Telstra could take an additional $3 billion to $4 billion of debt without impacting its ratings.

    "Further, we believe that a $10 billion buy back would only increase Telstra's cost of debt by 10 to 15 basis points," UBS said.

    Brokers contacted by AAP declined to comment on the report.

    The federal coalition, which will have control of both houses of parliament from July 1, is examining the sale of its stake in Telstra, dubbed T3, in its current term in government.

    It has called for advisers to conduct a scoping study to advise on the best timing, costs and structure for the $30 billion sale, which could net the final participants a total of up to $600 million in fees.

    A short list is expected to be announced in February, the winners named in March and the study itself is scheduled to be completed in the middle of this year.

    Telstra has appointed international head hunters Egon Zehnder International to search for a new CEO, after late last year announcing the departure of Ziggy Switkowski.

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