17/10/2006 - 22:00

T3 and ILH in a tale of two floats

17/10/2006 - 22:00

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If Charles Dickens was alive today, working as a finance journalist, he might have borrowed one of his most famous opening lines to describe last week’s events on the stock market along the lines of: ‘It was the best of floats, it was the worst of floats’.

Briefcase, with apologies to the late Charles and his classic Tale of Two Cities, imagines that this is how the old scribbler would have assessed the government’s third sell down of Telstra shares (T3), and the float of Integrated Legal Holdings.

T3 – despite continued rubbishing from some sections of the media and left-wing politicians who cling to the idea of governments owning everything from telephone companies to fish and chip shops (and yes, government used to in Perth) – is a very attractive financial package that will get better over time.

More on that later.

ILH, despite an impressive pedigree of political and legal connections, is a classic boom-time creation, which has little to recommend it apart from its novelty value, or as a talking point at upcoming Christmas parties.

As far as Briefcase can tell, ILH is a logical extension of the professional consolidation theory of business, which has been tried, with limited success, in the fields of medicine, accounting and marketing.

There has been greater success in pulling together professional services in the fields of engineering and pathology laboratories. Sonic Healthcare has been an outstanding winner with its pathology strategy. Accounting consolidations have generally been disasters, as have doctors in general practice.

The ILH float seems to be attempting an integration of several concepts in levering value from professional services.

Its chairman, John Dawkins, argues in his covering letter in the prospectus that “larger law firms are much more profitable per lawyer than smaller practices” – a claim based on research attributed to the Australian Bureau of Statistics.

On that basis it is reasonable to assume that ILH, which starts life by integrating three law firms and an online document business, will have the advantage of size.

But, it is also a policy of ILH that the law firms will continue to practice under their existing names, benefiting from cross-referencing of clients when specialty advice is required.

In other words, ILH seems to be saying we’re going to be a big law firm (and therefore more profitable), but be seen by the world as a series of small law firms which can “cross refer” to achieve the benefits of size.

Briefcase wishes ILH well, and acknowledges the theory behind the integration concept, and how it might well be to the benefit of the lawyers involved.

The question that nags away in the background, and which nagged away with accounting consolidations, such as Harts Group, Stockford and Count Wealth, is what will the customers think?

It is at the coal face that ILH will meet its greatest challenge, such as when a client is told that the firm he’s talking to lacks the skills to handle his case, but there’s another division of ILH that specialises in just that sort of thing.

Professionally, it is no doubt good practice to find the best lawyer for the job. But how will the customer see it, or will the customer even want to be passed over to other parts of the ILH group?

Then there’s the issue of full financial disclosure, which is a good thing for investors – though not necessarily such an attraction for customers who will have waved in front of them the fact that they helped make ILH handsomely profitable.

We all know that lawyers get paid well, but most of them show some discretion in pointing out this fact to the paying public. ILH will have no choice but to fully air its financials – which brings us back to the core question of what will the customers think.

•••

Telstra is a different kettle of float fish. It too is a business that believes in the benefits of size, but has two advantage over other companies, which should ensure the success of T3; success which might, in fact, become an embarrassment to the vending government in a peculiar way.

The obvious attraction to short-term investors is the yield; a whopping 14 per cent. That will suck in a lot of private investors, especially self-managed super funds.

Then there is the unspoken cost cutting assault being planned by chief executive, Sol Trujillo and his merry men.

To fully understand what is about to happen in the costs arenas, picture the many buildings that Telstra (and its ultimate predecessor the Post Master General) owned around capital cities, and the row, upon row, of switches and miles of copper cable. Now put all that in a couple of computers that take up as much room as a tea chest.

Shrinkage in the physical footprint of Telstra will be astonishing as it embraces the mobile broadband world, with the key to success being customer retention, which is precisely what’s happening in the marketplace right now, as Telstra stitches up its faithful with discounted services.

Telstra might be a business that everyone loves to hate, but the terms of the float are so generous as to ensure its success – and perhaps a very handsome price premium after listing – potentially prompting complaints that the float was too generous and the government gave away too much.

•••

Speaking of changes ahead, Briefcase has been wondering what will happen to RAC Insurance after the likely merger of Promina and Suncorp.

It was back in 2000 that the insurance arm of the Royal Automobile Club of WA merged with SunAlliance, which later became Promina. The resulting business, trading as RAC Insurance, is a joint venture.

What interests Briefcase is that, under some joint venture deals, a change of ownership of one party triggers certain rights for the others – such as buying back a slice of the business.

Whatever the outcome, whether the RAC buys back half of its insurance business or whether it finds itself in bed with a much bigger partner, the seeds have been sown for a local insurance sector shake up.

•••

 “An optimist is a man who has never had much experience.” Don Marquis

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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