Demand for Eircom shares in its initial public offering (IPO) is high at lower price levels but could falter if the firm becomes too "greedy" by setting the float price too high, market sources suggested yesterday.
A new report from NCB Stockbrokers has meanwhile warned that the firm's generous dividend, expected to be set close to 7 per cent, could be jeopardised if Eircom faces pressure from shareholders to reduce debt quickly or to step up its capital expenditure levels in the future.
A "more severe regulatory environment" is also cited as a potential threat to the firm's dividend policy. The dividend, which compares to an average yield of 3.9 per cent in the sector, is seen as Eircom's primary selling point as the firm prepares to rejoin the Irish stock market later this week.
The consensus among fund managers yesterday was that the firm represented a solid investment opportunity as long as it was well-priced. One manager said that he would be taking part in the offering, despite "medium-term" concerns over competition, regulation and the sustainability of the dividend after 2005.
There is a growing sense that the IPO will be priced at, or just beneath, the midpoint of the price range of €1.48 to €1.75 that has been flagged by the company.
This would leave a price of around €1.60 and would see Eircom representing about 2 per cent of the Irish market. "It's reasonably attractive there but not much higher," said one fund manager yesterday. "It should look good if they're not greedy. Our sense is that demand is reasonable and that it's fairly well covered at lower levels."
Cantor Index, the British spread-betting firm, yesterday indicated the offer was likely to be priced at between €1.43 and €1.50 a share if it is to avoid trading at a discount when the issue opens. The spread betting firm said sentiment had changed following the Madrid bombs. Mr David Buik, analyst with Cantor, said: "Outside of Ireland there is little appetite."
A 2 per cent weighting will automatically lift the stock on to the radar of fund managers, particularly those who have a specific Irish equity mandate.
The IPO will close at 4.30 p.m. tomorrow, with the price to be set that evening. "Grey market" trade will begin on Friday.
"Demand is good. The deal is going to be done and it's going to be well done," said a well-informed observer yesterday, again emphasising the importance of price in the offering.
A reasonably substantial number of private investors, who must each stump up €40,000 if they want to participate, are thought to be following Irish institutions' lead by applying for an allocation. These individuals are likely to be comparing a promised yield of close to 7 per cent on their investment to the minimal returns available on cash on deposit.
As far as international institutions are concerned, Eircom will inevitably find itself pitted against Belgacom, the Belgian telecoms operator that is due to float next week (see table for comparison).
NCB's latest analysis concludes that Belgacom is "keenly priced" at the top of its indicative range, while Eircom's appeal lies in its dividend yield.
The broker also warns that Eircom's shares look to have a limited upside after the IPO when considered against the wider telecoms sector.
NCB sees broadband as Eircom's "most promising new revenue stream" in the future and more or less dismisses the mobile market as a source of significant growth. More specifically, the broker writes off the chances of a €250 million acquisition of Meteor in light of Eircom's high gearing.
"The only real growth opportunity for Eircom is broadband," according to NCB analyst Ms Tricia McEvoy.
