Eircom advisers wanted flotation risks to be secret

Merrill Lynch told the Government in April last year that it did not believe there was any need to warn prospective investors in Telecom Eireann that the actions of KPN and Telia could damage the share price. Shares in Eircom closed yesterday at €3.16, down 20 per cent on their flotation price. The decision by major shareholder KPN last month to sell its stake in the company and the uncertainty over the future of Telia's holdings are seen as important factors currently depressing the price.

In a memo to senior officials in the Department of Public Enterprise and Telecom Eireann directors sent two months before the flotation, Merrill Lynch said: "We believe that there is a strong case for having no risk factors in the TE prospectus." They argued that other European telecommunications companies had not included such warnings in their prospectuses. The bank's advice was ignored and the Eircom prospectus went on to list a number of factors that could adversely affect the share price after the flotation. In particular they highlighted to prospective investors the possibility that "we could be influenced by significant shareholders whose interest may not be aligned to yours".

Last month KPN, the Dutch telephone group, said it was planing to sell its 21 per cent stake in the former Telecom Eireann at a discount to the market price. The negative impact on the news was further compounded by the announcement by Telia, the Swedish state phone company, that it would not be selling its 14 per cent stake at present. The subsequent failure by the Swedish group to make its intentions clear has acted as a further brake on the share price. The Minister for Public Enterprise Ms O'Rourke, relied on the fact that the company had included an extensive set of risk factors in its prospectus when she had to defend the shares' poor performance in the Dail last month.

The memo, which has been released by the Department of Public Enterprise under the Freedom of Information Act, argues that the prospectus is "quite negative" and "over-emphasises risks and underestimates opportunities". The Merrill Lynch executives go on to complain that the prospectus "generally fails to highlight proactive actions management has already undertaken or plans to undertake in order to battle competition and to deliver positive returns for existing and new shareholders". The memo continues, saying that Merrill Lynch did not feel the negative tone of the document was appropriate for an IPO and that it would have a negative impact on the company in the long term. The three-page document warns that investors might decide not to buy the shares "based on the overly negative perception of the company painted by the prospectus".

The memo then states that there is a strong case for not including any risk factor section. They point out that Deutsche Telecom, KPN, France Telecom, Tele Denmark and Swisscom did not include a risks factors section in the documentation. Merrill Lynch, along with AIB Capital Markets, shared in over £58 million worth of fees paid to advisers by the Government. Their fee was linked to the amount of enthusiasm shown by investors in the offering.

The American bank was the most bullish of all the advisers. It had recommended that the company be floated at €4.26 per share. The Government opted for €3.90 per share which was midway between the Merrill Lynch price and the €3.73 per share recommended by AIB Capital Markets.