KPN and Telia may have to accept a significant discount on the most recent €3.72 price for the near 800 million Eircom shares they plan to sell in a secondary offering to European and North American investors, market sources have stated. The offering may be sold at €3.50 per share or less.
While the final pricing of the secondary offering, which is due to be launched on Wednesday, will not be determined until after a roadshow to institutional investors and a bookbuilding exercise, market sources believe that such a large block of Eircom shares may require a discount of 30 per cent or more. That suggests a price of less than €3.50, 40 cents below last July's flotation price and a long way off the €5.00 high reached shortly after the flotation.
While this expected weakness in the share price will be further bad news for the 480,000-odd Eircom shareholders who are nursing losses on their investment, some market sources believe that the secondary offering of the 770 million shares held by KPN and Telia could represent a buying opportunity. "Given the way the sector is right now, there's no question but that the shares won't get a high price. That could be an opportunity to have a punt," commented one broker.
While the breakdown of the allocation between institutional and retail investors has not been formally decided, it is understood that Irish retail investors will be offered between 10 and 20 per cent of the secondary offering, with one source suggesting that the final allocation to retail investors will be around 15 per cent (about 115 million shares).
A price of €3.50 would mean that about €400 million (£315 million) worth of shares may be offered to Irish retail investors. Eircom shareholders will also be getting a bonus share in July for every 25 shares they hold on the anniversary of the flotation.
While a spokesman for Eircom would make no comment yesterday, it is understood that Morgan Stanley, acting for KPN and Telia, and Merrill Lynch, representing Eircom, have completed preparations for the secondary offering. An international roadshow to institutional investors has been arranged, while substantial advertising space has been booked to promote the retail element of the share offering.
The decision by KPN and Telia to sell at this stage is a surprise to the extent that the Dutch and Swedish groups are selling into a weak market for technology and telecom shares, and a decidedly poor market for small telecom companies like Eircom.
The decision to sell comes after KPN and Telia failed to find a trade buyer for their combined 35 per cent stake, although some sources said yesterday that a trade buyer could still emerge, even during the secondary offering. That process could last a matter of a few weeks, while KPN, Telia, Eircom and their respective advisers embark on the institutional roadshow and bookbuilding exercise.
Bookbuilding, in essence, is a process whereby institutions are asked how many shares they want to buy and what price they are prepared to pay. At the end of the process, the final price and the allocation of shares will be determined.
Informed sources have indicated that such is KPN and Telia's determination to exit Eircom that only an absolute collapse in the market in the next few days would persuade them to postpone the secondary share offering. Both selling shareholders - and indeed Eircom's army of small shareholders - will be hoping that the markets remain stable while the process is in train.
The movement in the Eircom share price since the July 1999 flotation will lend fuel to the argument that the flotation was priced too aggressively - at a 30 per cent premium to the sector - especially if KPN and Telia end up selling off their stake at a 30 per cent discount.
It is understood that aggressive pricing was mainly down to pressure from the Department of Finance and the recommendation of the Government's adviser on the flotation, Merrill Lynch.
Indeed, Merrill Lynch is understood to have urged that the flotation should have been priced even more aggressively - somewhere in the order of €4.30 per share - before the Government decided to opt for a more cautious €3.90.
