The continuing weakness in the Telstra share price since the T3 prospectus was launched on Monday has raised some interesting issues about the motivations of our big institutional investors.

While the well-paid government selling team has incentives to maximise sale proceeds, the institutional buyers would love to drive the price as low as possible. The AFR’s Street Talk column speculated quite openly about this today as follows:

Institutional investors are playing an interesting game with the government and seem to want to set a price of around $3.20 to $3.50 a share. As such, it’s in their interests to keep the price down.

Macquarie Bank’s Andrew Levy has certainly not been shy in talking the price down. He released a report on Tuesday which concluded: “Given all the associated risks … we would only feel true value was emerging at closer to $3.20.”

Hmmm, maybe the government shouldn’t have booted Macquarie off the selling team after all.

Then again, it seems difficult to pay for a buy recommendation these days because even analysts from the houses on the selling team are quite bearish on Telstra.

I well remember a senior member of the team that Jeff Kennett put together to flog off Victoria’s $30 billion energy sector make the claim that floats never deliver true value because the big institutions act like a cartel to drive the price down. He cited the pathetically low $5.40 for the first Commonwealth Bank sell-off as the best example.

The Kennett Government were certainly once bitten twice shy when it came to floats, as they never returned to the game after the debacle that was the Tabcorp offering in 1994.

At the time it was felt that Tabcorp CEO Ross Wilson had a screaming conflict of interest because he was guaranteed 1% of the company and naturally wanted to pay as little as possible. Those three million shares at just $2.25 ended up making Wilson about $50 million.

This raises an interesting question about Sol Trujillo’s motivations because we still don’t have enough detail on his equity-based incentives and share allocations.

For instance, if Sol has decided to pump $10 million into the T3 institutional offer, wouldn’t he be just like the institutions and want to pay as little as possible? The risk section of the prospectus certainly seems a little overblown and Phil Burgess is still out there blasting regulation – none of which will help the government maximise sale proceeds.

Peter Fray

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