A decision on whether Telecom Eireann can offer its customers shares at a discount to the final offer price at the June flotation will be made in coming weeks. Meanwhile, it is now clear that the Government intends to sell 35 per cent of the company in June.
The company would like to be able to offer its customers special concessions as part of the public offering. But its ability to do so may be limited because of its semi-state status.
Discussions are under way between officials from the Department of Public Enterprise and Telecom and their financial and legal advisers on the issue. Sources suggested that as a semi-state company Telecom may be precluded under European Union rules from giving preference to one company over another. Therefore, Telecom may be unable to offer shares at a preferential rate to its corporate customers, a tactic used by some companies to improve their competitive position.
And there are fears that offering shares at a discount to its retail customers could lead to a challenge from taxpayers who are not customers but have helped to support the development of the company through their tax contributions. While no decision has yet been made it appears likely that the Telecom shares will be sold through an open offer to the public without any special arrangements for Telecom's own customers.
As preparations for the flotation continue, with market research about to start to establish the likely retail appetite for shares, the total cost of organising and executing the public offering is expected to exceed £40 million (#50.7 million) when advisers and other expenses have been paid.
Costs are expected to amount to just less than 4 per cent of the funds of more than £1 billion which will be raised through the sale of up to 35 per cent of Telecom Eireann to retail and institutional shareholders.
In the November estimates for the Department of Public Enterprise, some £40 million was set aside for the fees, commissions and expenses expected to be incurred by the Government when it sells some of its 51 per cent stake in Telecom.
In addition, the Telecom board is expected to pay about £2 million to its own financial advisers.
The Department's £40 million provision is expected to break down roughly into about £32 million in fees and commissions to the financial advisers and underwriters, about £7 million for marketing including printing design and advertising and about £800,000 for public relations advice.
Assuming funds of £1 billion will be raised, the £32 million provision for fees and commissions is broadly in line with general market practice for large share offerings. Underwriting charges are estimated at about £20 million, or the market rate of 2 per cent of the amount to be raised. At £12 million, commission is 1.2 per cent of the amount to be raised and at the lower end of the normal 1 to 2 per cent of funds raised range.
But at this stage the £40 million figure is just a provision - the cost cannot be fully nailed down until the decision on the exact amount to be raised is made by the Government. As the owner of 51 per cent of Telecom, the Government has appointed its own advisers to the offer. AIB Capital Markets and Merrill Lynch are joint financial advisers to the Government while Drury Communications and Dewe Rogerson won the tender for public relations/marketing advice.
In line with its duty to advise its shareholders on the offer, the Telecom board has appointed its own financial adviser - ABN AMRO Rothschild.
The Government is expected to sell between 30 and 35 per cent of Telecom or about two-thirds of its existing 51 per cent stake. The sale is expected to raise at least £1 billion. With telecom shares rising rapidly in equity markets in Britain, France, Germany, Switzerland, the prospects for the offer are currently good.
According to the Department of Public Enterprise, the provision for costs "is based on commercially negotiated rates for work of that nature. . . It also includes money for a PR contract and a large printing bill for at last half a million prospectuses."
How keen is the price the Government will pay its financial advisers? Assuming the offer is to be fully underwritten, the underwriting costs are within the general market practice for share offerings while the commission is at the lower end of market practice.
Some 19 groups pitched for the contract so the tenders should have been competitive. But the exact cost will only become clear when the offering is completed.
If fixed fees have been agreed, the higher the funds raised the more competitive the commissions and fees for the financial advisory work will be. But the cost is more likely to have been based on the more normal percentage of funds raised.
One question that could be asked is whether it is necessary to fully underwrite the offering. Given the current big appetite in international equity markets for telecoms shares and expected strong demand from both retail and institutional investors for the Telecom Eireann offering, it may be overly conservative to fully underwrite the offering. But in volatile markets this is a difficult call. Work is continuing to allow the initial public offering of Telecom shares to proceed in June if market conditions remain favourable.
