The hundreds of thousands of people who subscribed for Telecom Eireann shares by yesterday's 4 p.m. deadline will know in a week's time the number of shares they will actually receive and the price at which Telecom shares will begin trading on the Dublin, London and New York stock markets.
That price will determine what first-day profit, if any, Telecom's new army of shareholders can expect when the shares begin conditional trading the following day and unconditional trading on July 14th. As things stand, however, it seems certain that larger applications for Telecom shares will be scaled back severely, and that the shares will be priced to provide a first-day gain in the order of 10-15 per cent.
How the shares are finally priced will be dictated by the presentations to over 150 institutional investors over the past two weeks and over the next week. These presentations have been followed by the book-building exercise, which at its simplest, involves the various co-managers of the share offering asking institutional investors how much they will pay for Telecom shares and how many shares they actually want.
Retail and institutional investors are each guaranteed a minimum of 432 million Telecom shares - 40 per cent each of the total being sold by the Government. How the remaining 216 million shares are divided between the retail and institutional applications has yet to be determined, but the Minister for Public Enterprise, Ms O'Rourke, has already said that she favours the maximum involvement for small investors, and this suggests that most, if not all, of the remaining 216 million shares will go to the retail side of the flotation.
But just as many private investors have applied for many more Telecom shares than they expect to get, in expectation of applications being scaled back, major institutional investors will almost certainly adopt a similar approach. Most institutional investors will undoubtedly be heavily underweight in Telecom shares, and this pent-up demand from the institutions is expected to be the main stimulus for a strong after-market in the shares.
At this stage, it is impossible to gauge the level of over-subscription from the institutions. But given the current demand for telecom shares throughout Europe - indicated by their 30-plus earnings multiples - and Telecom's specific exposure to the Irish economy, some analysts believe that it will be no surprise if the institutional offering is over-subscribed fourfold.
For the two Government departments involved in the flotation and for Telecom itself, the eventual price of the shares presents a delicate balancing act. The Department of Finance, needless to say, wants the maximum possible income from the sale of the flotation. The Minister for Public Enterprise wants to ensure a reasonable profit for Telecom's army of private investors and to create a potential investor base for future State-privatisations. Telecom itself wants a happy and contented group of institutional shareholders and will be hoping that the shares are not too aggressively priced.
Ideally, the shares should be priced to ensure a first-day rise in the order of 10-15 per cent. Anything more than 20 per cent and the Government will undoubtedly face accusations that a prize State asset has been sold off too cheaply. If the early premium is substantially under 10 per cent, then private investors might feel short-changed and possibly disillusioned towards further public share offerings from the Government.
