Fees Cut But Still Lots Left For Brokers

Sydney Morning Herald

Tuesday September 7, 1999

By MORGAN MELLISH

Selling T2 is the biggest job in town for the stockbroking community but it will not be nearly as lucrative as selling the first tranche.

A keenness among the major brokers to be involved and the Government's desire to cut costs has resulted in a sharp reduction in brokerage fees compared with the first tranche.

Stockbrokers, in fact, are calling it the cheapest major float ever done.

The Government is predicting that brokerage and other fees from the $17 billion float will total about $130 million, or about half the $260 million paid out in first time around.

The 17 stockbrokers and banks charged with selling the shares are expected to receive between $80 million and $100 million in brokerage, down from $125 million in T1.

``The brokers can't be too happy because they're not going to get as much in fees and it's a harder job, so the Government's definitely on a winner here," one fund manager said.

``They will get it away but they will actually have to get out there and sell it particularly to the overseas instos because the value argument's just not there anymore."

For T1, the Government paid the brokers a fee of 1.1 per cent of the total amount of shares they sold to small investors.

This time around, that fee being paid to firms such as joint global co-ordinators ABN Amro Rothschild, Credit Suisse First Boston and JB Were has fallen to 0.5 per cent.

Fees being paid to brokers selling to institutional investors which includes Merrill Lynch and Warburg Dillon Read have been slashed by similar amounts.

On top of this, the project management fee being shared by JB Were, CSFB and ABN Amro has dropped from $35.6 million to $10.5 million.

``The Commonwealth is the biggest customer in the country and they've got a fair amount of buying clout and a lot of brokers put in quotes with extremely fine fees," one broker involved in the float said. ``This time around, the taxpayers definitely can't complain."

The reduction in fees is also because some of the work done by brokers during the sale of the first tranche such as setting up legal structures for listing in the US does not have to be repeated.

A spokesman for the Telstra offer said: ``The Commonwealth has sought to contain costs as much as possible and an amount of work undertaken on T1 was relevant to T2, notably some of the work undertaken in respect of the US."

None of the brokers are particularly happy about the fall in fees but they can still make money because of the after-market from the 2.13 billion new shares being sold.

The Australian Stock Exchange estimates that since Telstra listed in November 1997, it has accounted for $31 billion to $32 billion of turnover, all of it generating commissions for stockbrokers. On top of that many firms have offered derivative products and margin lending arrangements that have generated fees.

Mr Charles Moore, the head of private client investment services at Ord Minnett, which is an Australian co-lead manager, said: ``The retail fees are actually quite an attractive incentive for the selling network. While the retail fees are less, they are based on a significantly higher price.

``They've priced it attractively for retail investors and they've created certainty but there won't be a frenzy of excitement like we saw in the first one because it's a known commodity."

Other brokers involved in the float include Macquarie Equities, BNP Equities, Salomon Smith Barney and Goldman Sachs.

While most of the big brokers will get lower fees compared to T1, T2 has given two regional brokers Hartley Poynton and Morgan Stockbroking a chance to get a slice of the action through selling shares to regional Australia.

Morgan Stockbroking director, Mr Bill Chatterton, said: ``We would love to get this sort of work in future privatisations and we would hope that this is not the last instance where we look after regional Australia.

``It's enabled the Government to make shares available to those people that may otherwise not be aware of the issue."

The fee* feast
                                     T1      T2
                                      pc      pc
Retail                            1.1       0.5
Domestic institutions    0.8       0.64
Overseas institutions  1.75      0.84
Total fees est.          $260m   $130m
*Brokerage fees will be a percentage of money raised: