The recent announcement from the Government that it intended to privatise Telecom Eireann should come as welcome news to private investors. In one fell swoop a publicly-quoted Telecom Eireann will add breadth and depth to an Irish equity market which is still dominated by financial stocks.
Of greater significance, is that telecommunications is one of the fastest growing sectors of virtually all economies, both industrial and emerging. Furthermore, the medium and long-term trends point to sustained above-average growth.
Looking at the British market bears out the attraction of the Telecom sector. Although in an international context Britain is growing at a moderate pace it is expected to expand at an annual rate of 1011 per cent over the next five years. By far the most rapidly growing segment of the market is the mobile sector which is forecast to grow at an annual average pace of 25 per cent per annum.
The telecoms market accounts for a significant portion of most economies' GDP. Across OECD countries the industry accounts for just under 2.5 per cent of GDP. At the top end of the range is Australia where the telecoms sector represents 3.3 per cent of the economy. Presumably the vast distances and sparsely populated nature of the country has resulted in much greater expenditure on telecommunications. At the other end of the spectrum is Turkey with a very immature telecom sector which accounts for only 1.1 per cent of its GDP.
The quoted sector in Britain now offers investors a wide array of companies covering the various sub-sectors of the telecoms industry as illustrated in the table, above.
The share prices of these companies have risen strongly in recent years and while valuations are demanding the long-term prospects are good. As well as giving exposure to the British market some of these companies also operate internationally. In particular, Cable & Wireless generates the bulk of its revenues from Far Eastern and other rapidly growing overseas markets. It is also quite clear from the above list of companies that the mobile telephone market has been the major source of growth.
Despite the fact that the major telecom company in Ireland remains in State ownership, private companies have been rapidly developing their services in recent years. Already, some have been taken over by large international companies. However, some have begun to come to the stock market although the initial quotes have been in overseas markets such as the US Nasdaq and AIM in Britain.
ESAT is the largest quoted Irish telecoms company and looks set to grow rapidly in coming years. Stentor is a much smaller company at an earlier stage of development and is quoted on the Alternative Investment Market (AIM) in Britain. This is a market specifically designed for small start-up companies.
Over the next year or so it is likely that a number of Irish-based telecommunications companies will seek a public listing. However, most of these are likely to be early stage companies which will probably be of more interest to institutional investors. A substantial broadening of investor interest will have to await the flotation of Telecom Eireann which is planned for late next year.
The experience of such privatisation in other countries is that they create a new army of shareholders from amongst the existing customer base. Therefore, as well as expanding the investment choice available on the Irish stock market, the flotation of Telecom is likely to dramatically increase private investor interest in the overall equity market.
