The end of an increasingly fractious relationship between Telstra and its major shareholder is in sight after yesterday’s disclosure by the Future Fund that it is no longer a substantial shareholder.

With a shareholding below 5% the fund, which played a major role in forcing the departures for former Telstra chairman Donald McGauchie and chief executive Sol Trujillo and has continued to use the holding to put pressure on the group, will have less ability and motivation to try to influence Telstra’s affairs.

Now that it is below the disclosure threshold, its future sales of Telstra shares will also be less transparent, particularly if it were to stop reporting its Telstra shareholding separately in its quarterly reports and simply include it in the wider Australia equities component of its portfolio.

While the fund has now sold down below the substantial shareholding threshold, that doesn’t signal an end to a sales program that has seen the shareholding reduced from its original level of about 17% of Telstra to less than 5%.

A neutral or index weighting for Telstra within the fund is probably closer to, if not below, 1%, which implies there could be another 500 million or so shares, worth more than $1.3 billion, yet to be sold.

In less than 18 months, however — since the $2.4 billion sale of 5.5% of Telstra in a block trade in 2009 — Telstra and its adviser on the subsequent phase of the selldown, Citi, have managed to more than halve that shareholding, selling about 750 million shares into the market. Maintaining that program could see the fund’s stake reduced to negligible levels within a year.

The sales strategy has been unusual. Rather than sell down in big licks, as might have been expected, the fund has sold continuously into the market, accepting whatever the market price might be on the day. It has accounted for, it estimates, less than 15% of the average daily turnover in Telstra shares, excluding off-market sales.

The steady selling hasn’t been obviously disruptive to the market in Telstra shares and has avoided the discounts to market that might have occurred had it opted for a continuing series of block trades but has presumably still depressed the Telstra share price relative to what it might have been.

Even without the sales, however, the fund’s holding would have been perceived as an over-hang, given that the fund had made it clear it wanted to reduce the exposure to levels consistent with a conventional investment portfolio.

With the end of the program now in sight it might gradually ease some of the pressure on the Telstra price that such a large scale supply of stock into the market for Telstra shares would inevitably have created.

It will certainly please Telstra’s board and management that the fund’s capacity to try to intervene in their affairs has diminished so significantly with the sale of shares equivalent to about 4% of the company since the start of the year.

At last year’s annual meeting the fund voted its then 9.9% shareholding against every resolution put to the meeting in what was an obvious protest or no-confidence vote against Telstra’s board and management. While all the resolutions were passed on proxy votes, the fund’s aggression has discomfited Telstra.

This first appeared on Business Spectator.

Peter Fray

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