Australian Government Finally Reevaluates Telstra's Paper Worth on the Budget

Treasurer Peter Costello has accepted reality and cut $6.5 billion from the Federal Government's 51 per cent stake in Telstra. Releasing the Mid-Year Economic and Fiscal Outlook, Mr Costello said this year's slump in Telstra's share price made it necessary to include a more realistic estimate of the proceeds of the sale of the government's 6 billion shares.

With the shares valued at $5.25 in the May budget, Mr Costello said Treasury had based its new price estimate on the 90-day average price of Telstra up to December 8, which worked out at $4.13 a share.

"That is a far more realistic price than $5.25 in the current climate," Mr Costello said. "Some people will say that is still above market but the Government has decided to take a 90-day average, as we do in relation to a number of other assumptions." That means the Government's valuation of its stake in Telstra has fallen from $31.5 billion in May to about $24.8 billion.

In March, Telstra shares hit $5.50, their highest all year, which valued the Government's stake at $33 billion. But with Telstra shares closing yesterday at $3.82, the Government's 6 billion shares were worth only $22.92 billion. The shares have fallen 22 per cent this year, in part due to pessimistic forecasts by new chief executive Sol Trujillo, who has argued that Telstra is constrained by too much Government regulation.

Some investors said the Government might still struggle to sell its holding at the reduced price. Rohan Walsh, of Invesco Asset Management Australia in Melbourne, said there was fear that more profit erosion was yet to come at Telstra. "We continue to see pressure on the existing business, irrespective of the regulatory outcome," he said. Some analysts said a price as low as $3.70 or $3.80 was more realistic. "The new target is still, in my opinion, an ambitious price," said independent telecommunications analyst Paul Budde. "Based on my comparisons of similar telcos overseas, the price is between $3.70 and $3.80."

But Mr Costello cautioned against valuing the whole of the Government's stake according to the market price, because the shares would not necessarily be sold in one go. "The reason why we have taken this assumption in relation to the Mid-Year Review is we expect either Telstra will be sold, or if the full sale of Telstra does not go ahead, it may well be that the Future Fund will hold Telstra shares and in those circumstances the earnings from those shares will be allocated to the fund rather than the budget."

Mr Costello said that whichever way it turned out, the earnings from the proceeds of Telstra would not be received in the underlying cash balance after the 2006-07 financial year. "They are technical assumptions and I explain them for the sake of the record," he said.