Telstra (TLS) Shares: Broker Call

Telstra (TLS) has a maintained Neutral Broker Call from stock analyst Macquarie Research Equities (MRE) and a share price target of $3.50. There is an upside risk considering the details below, but investors must also consider the significant downside risks to Telstra's core earnings.

The following extract looks at the potential for Telstra to: a) acquire Telecom New Zealand’s (TEL) directory businesses; and b) restructure its media assets. By following a similar strategy to PBL and SEV in spinning out its media assets (as opposed to selling them completely), Macquarie Research Equities (MRE) believe Telstra could unlock $10.6bn in cash, which could underpin a 5.2% EPS accretive share buyback costing $9bn.
Step 1: Buy Telecom NZ’s directories: Telstra appears to be a natural bidder for Telecom New Zealand’s directories business. It has a stated a desire to grow Sensis through acquisitions, and there exist synergies from leveraging its Australian technology and management skills on the other side of the Tasman. The abundance of private equity capital in the market and the suitability of such an asset to private equity strategy suggest Telstra/Sensis would not get the TEL directories cheap. However, even at 12.3x FY07 EV/EBITDA, the deal could be marginally EPS accretive in FY07 (based on debt financing).
Step 2: Spin off the New Sensis into a JV: Telstra could then spin the two directory businesses into a JV with a strategic or private equity partner. This would allow Telstra to maintain a level of control, but also free up cash that could be used for new acquisitions or returned to shareholders. The structure
of such a deal would be similar to the recent deals done by PBL/CVC and SEV/KKR.
Step 3: Gear up the JV: The value creation from such a deal can come from more aggressive financial engineering of the JV. MRE have assumed the Sensis JV gears up to a net debt/EBITDA ratio of 5x, which is conservative compared to the recent PBL and SEV deals done on gearing multiples of over
7x EBITDA. This would see $10.6bn repatriated to Telstra.
Step 4: Return $9bn to shareholders: Assuming this cash was used to undertake a $9bn share buyback (~20% of Telstra’s capital!), Telstra’s core operations would be operating with a net debt to EBITDA ratio of 1.5x, compared to a pre-transaction multiple of 1.3x and a peer universe of 1.3–1.7x. The accretion to shareholders post the buyback would be 5.2%.

Telstra Limited is listed on the Australian Stock Exchange (ASX) under stock code TLS. You can view their investor website here. TLS was first listed on the ASX on 17 November, 1997. Telstra is a telecommunications Carrier. The company provides of telecommunications and information services, including mobiles, internet, and pay television. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. Check your charts and good luck with your share trading!