The Exchequer is likely to get a £4 billion windfall when it sells off its shareholding in Telecom Eireann in the biggest ever flotation on the Irish stock market.
Analysts believe the Government is likely to sell off its Telecom stake at around the middle of the £2.64 (€3.34) to £3.27 (€4.15) range detailed in the prospectus published yesterday. The £2.95 mean would value Telecom at £6.5 billion and would make Telecom the third biggest company on the Irish stock market, after Allied Irish Banks and Bank of Ireland.
This price would value the Government's stake at around £3.2 billion while close on a further £800 million will come through the agreement whereby KPN/Telia have the option to increase its stake by a further 15 per cent to 35 per cent. How much KPN/Telia will pay for the additional 15 per cent will be decided under a complicated formula on January 31st next year on the basis of the offer price or the average trading price in the three-month period to January 31st, whichever is the lower.
The Minister for Public Enterprise, Ms O'Rourke, would not be drawn on how the Government would use this unexpectedly large windfall and whether it would be used to reduce the £30 billion national debt.
The £2.95 price would still see Telecom floated on a substantial premium to the average for the European telecommunications sector, a premium that sources close to the flotation said reflected Telecom's greater growth potential compared to other European telecom companies and the comparatively low penetration of both fixed line and mobile tele communications in Ireland.
A price of £2.95 is equivalent to a multiple of nearly 9.5 times EBITDA (earnings before interest, tax and depreciation) compared to the European sector price/ EBITDA average of 8. Telecom and the Government's advisers on the flotation, AIB Capital Markets and Merrill Lynch, have already had pre-marketing briefings with institutional investors and one source said the institutions were happy with the price range indicated in the prospectus.
Detailed presentations to institutional investors will begin this week, Telecom chief executive Alfie Kane and chief financial officer Malcom Fallen heading two separate teams will conduct 150 different briefings with institutions before the final price of the shares is decided on July 7th.
Telia, the Swedish telecoms group which is one half of the KPN/Telia strategic alliance, is involved in merger talks with the Norwegian group Telenor - which owns 49.5 per cent of Esat Digifone, Telecom's sole current competitor in the mobile phone market.
This presents obvious conflicts of interest if the Telia/Telenor merger is completed. Telia has already informed Telecom that it will either sell its stake in Telecom or the Telenor stake in Esat Digifone if the merger goes ahead.
Most in the industry believe that of the two options, Telia will sell its stake in Telecom through a stock market offering. Already, Telia and Telecom have agreed that if Telia sells its Telecom stake, it will pay £12.24 million in respect of contributions that Telia will, as a result not be making to Telecom under the 1996 strategic alliance agreement.
As was reported recently in these pages, KPN and Telia and their Comosurce joint venture have agreed not to sell any shares for six months after the flotation and also not to increase their stakes in Telecom for 18 months after the flotation.
Mr Colm Doherty of AIB Capital Markets, one of the global co-ordinators to the flotation, dismissed suggestions that Telia's shareholding would act as an overhang on the Telecom shares when they begin trading. "There won't be an overhang, because the demand for the shares will outweigh any overhang," he said, adding that the six-month lock-in whereby Telecom shares cannot be sold applies Telia.
