Telstra Good News

PORTFOLIO POINT: After a year of talking the company down, expect Sol Trujillo spring a pleasant surprise. And for Telstra and the Government to end their long standoff.

Is it just me, or does everybody hate Telstra? In the past year, Telstra chief executive Sol Trujillo and the other amigos have become a nuisance for federal politicians. The regulator is no fan either. The Packers and Murdochs have been scheming to get Telstra off the Foxtel share registry since the day after that joint venture began. And the rest of the media just put the boot in, because that’s what all good pack animals do: smell blood, attack.

In mid-July it emerged that Trujillo had been voted Australia’s least-admired chief executive. And for good measure Telstra is among the nation’s least-admired companies. The survey was conducted by East Coles on behalf of BRW magazine and consisted of polling stockmarket analysts at brokers and institutions.

Well I guess that’s why Telstra is trading with a 7.3% fully franked yield. Everyone hates it.

Now I think I’m out on a limb on this, but it seems to me that in the five years before Trujillo arrived, Telstra’s share price had fallen 44%, from $9 to $5. Since his arrival, it has fallen another 24%, to $3.80. Not a great performance, I’ll grant, but most damage pre dates him.

It also seems to me that before Trujillo arrived, there was a tacit understanding between Telstra and the Government. While the Government was trying to offload its Telstra shares, Telstra restricted capital expenditure, and pumped up the dividend. And all the while Telstra was losing market share.

So it’s July 2005, and along comes Trujillo and the first thing he notices is that the Government needs his sign-off on prospectus forecasts if the Government wants to sell Telstra shares to mums and dads. Hmm.

The second thing he notices is that the Government-appointed regulator enjoys regulating Telstra’s activities, thereby giving Telstra’s competitors a leg up. Hmmmm. I’m one of the few to give Trujillo the credit for linking the two issues; that is, if the Government wants Trujillo to sign off on some decent earnings forecasts, he wants less regulation. Quid pro quo.

But this government wasn’t elected yesterday. It has a few tricks up its sleeve. Hence the suggestion that instead of selling Telstra shares to mums and dads, the Government could park them with David Murray’s Future Fund. No need for Trujillo's sign-off on prospectus forecasts in that case! One for the Government. And perhaps a personal sting in the tail for Sol as well. You see Murray could dispose these shares as he saw fit '” over time. That’s called a share overhang and with over half the company (6.4 billion shares), it’s a big one.

Which brings us to Trujillo's employment contract. Sol started on a cash salary of $3 million a year. In addition, he can earn up to 100% of his salary under the short-term incentive plan. Half of this vests as shares over the following three years. He is also eligible to participate in Telstra’s Long-Term Incentive Plan, which is equivalent to 133.3% of his cash salary but vests as “performance share rights” whose performance will also depend on the share price.

In other words, Trujillo has a medium and long-term incentive to get the Telstra share price up, in my view. And if David Murray has 6.4 billion shares to dribble into the market over time, no matter how successful Trujillo becomes, it will be very difficult to get that Telstra share price higher in any meaningful way.

That’s a big reason for Trujillo to not like the idea of the Government just parking their shares with the Future Fund. And a big reason why the Government and Telstra are likely to find common ground, and soon. I’m tipping:

1. A compromise in the great Telstra/Government standoff.
2. Some regulatory relief but not as much as Telstra would like.
3. A better-than-expected Telstra result on August 10. In the grand sharemarket tradition of new management, Trujillo has spent the past year talking down expectations (implicitly blaming old management). Almost the entire market fears the worst. It’s time for a positive surprise, a result better than that feared by the market.
4. Telstra signs off on some reasonable forecasts but maybe not as high as the Government would like.
5. A Government sell-down by the end of the year. I expect this to incorporate an installment mechanism designed to goose up the already very high yield of 7.3%.

If I’m right, then Telstra is going higher, not lower. The extent of any Telstra/Government détente will determine how high. And talk of Macquarie Bank taking a strategic stake can only help the share price in this regard.

Disclosure: The author is a shareholder with both a physical and derivatives position.