Setting a share price for any flotation involves striking a delicate balance between the interests of the company's sellers and those of its prospective buyers.
Sellers must ensure they do not sell off their company too cheaply, while buyers will want a price that provides an opportunity for capital gain in the form of share price increases. The final figure will be influenced by the demand for the shares, the supply available, market conditions and sectoral conditions, among other issues.
Brokers are suggesting that Telecom shares will rise by between 10 and 20 per cent - or possibly even more - in early trading, because of demand and supply factors. In the longer term, assuming stock market conditions remain favourable, the aggressive flotation price set for the company - which operates in a competitive and rapidly changing sector - probably means that the price will settle at around 10 per cent above the flotation level.
At £3.07p (#3.90), the Telecom share price is at the upper end of the expected range - £2.64 to £3.27 - quoted in the Telecom prospectus. It is at a premium to the European telecoms average, both on the normal enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) ratio and on a price/earnings ratio (PER).
Figures supplied by BCP Stockbrokers show that, at the 307p price, Telecom shares are on a EV/EBITDA ratio of 10.5 and a PER of 36.4 (excluding the proceeds of the Cablelink sale). At these levels, the shares are on a premium to companies like British Telecom, which is on an EV/EBITDA of 10.2, Deutsche Telekom, on 9.5, and Tele Danemark, on 8.0.
But BCP director Mr Martin Kane considers this premium is justified on a number of grounds:
Ireland's mobile phone penetration rate, at 2 per cent, is low by European standards;
Telecom will be Ireland's only large stock that is a pure play on the Irish economy and its strong economic growth;
The company will benefit from restructuring;
Telecom will benefit from the reduction in Irish corporation tax rates.
Davy Stockbrokers analyst Mr Scott Rankin said he was not surprised at the price level. "For a long time we've been thinking around the mid-point, and #3.90 is only four 4 per cent above the midpoint, so it's not a real surprise," he said. "It should leave good scope for a decent gain over the next couple of days . . . bearing in mind the sort of levels of demand we think there is."
One fund manager commented that he "could not imagine a situation where there would not be a significant increase - short of a full market collapse".
What happens in the longer term will depend on a number of variables. One of these is the basis of the retail allocation - the variable being the level of flow-back of shares into the market from retail investors. There will be a wait of a least a week before any pattern becomes clear, since most retail investors will not be able to trade until after they receive their share certificates/notice of allocation.
