Merrill Lynch becomes Telstra's business advisor

And gives up a role in the distribution of shares when T3 goes to market next year.

Australia's national telco Telstra has appointed Merrill Lynch as its business advisor - a job that is likely to earn the bank substantial fees over the next two years. Merrills was one of an undisclosed number of banks that pitched for the advisory role. Two of the other frontrunners were Deutsche Bank and boutique firm Carnegie Wylie.

The win means that Merrills will not be eligible to sell shares when the third tranche of Telstra (worth A$30 billion) goes to market next year, even though the firm acted as a co-lead manager on the first two Telstra sales, T1 in 1997 and T2 in 1999.

With Merrills now out of the running for a global co-ordinator role, the government will be hoping the other international investments banks still in the race have enough distribution strength to sell the offshore component of T3. Merrills has one of the largest private client broker networks in the US.

In pitching hard for the advisory mandate, the US house clearly thinks there is more money to be made from corporate banking fees over several years than from a one-off role in the share issue. Market talk says the government will be squeezing fees on the sale.

Merrills has acted as an advisor to Telstra in the past, but as part of a panel of advisors. This new role is a sole mandate and puts it in the box seat to give the company advice on corporate restructuring, the sale of subsidiaries, and the refinancing of nearly A$12 billion in debt.

Its immediate responsibilities relate to the scoping study on the structure of T3. The firm will work closely with UBS and Caliburn Partnership, which were assigned by the government, which still owns 51.8% of Telstra's shares, to conduct the scoping study. Once the study is released in June, Merrills will advise Telstra on its contents.

In making the appointment, Telstra's chairman, Donald McGauchie, said, "The appointment follows Telstra issuing a request for proposal and a rigorous selection process. I thank all the firms that participated for their efforts in putting forward such high calibre proposals."

The appointment is a coup for Kevin Skelton, an 18-year Merrill Lynch veteran, who is now country head and chairman of investment banking in Australia. Skelton's background is domestic and cross-border corporate advisory, equity issues and debt financings.

In an interview with FinanceAsia earlier this year, Skelton said he wanted to grow the bank's franchise, focusing on "mergers and acquisition advisory, equity sales and trading, primary and secondary equity offerings, cross border debt financing and structured finance".

Merrills had retreated from the Aussie markets in recent years with its staff numbers bottoming out at 400 in 2002. It now employs 500 people and plans to grow its business across all divisions.

Both Skelton and the bank's telco and media investment banker, Tony Holt, will manage the new Telstra relationship.

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