The Government now looks likely to price the Telecom Eireann shares at around 290p each, a level which Ministers hope will ensure an early profit for the almost 550,000 members of the public who have applied for shares. Intensive meetings over the weekend and into next week will be held to discuss the price, but it now appears that it will be set slightly below the 295p mid-point of the range indicated by the Government.
The Cabinet sub-committee which will make the final decision on the share price comprises the Minister for Public Enterprise, Ms O'Rourke, the Tanaiste, Ms Harney and the Minister for Finance, Mr McCreevy. The final decision will not be made until after the offer to institutional shareholders closes next Tuesday.
The price and the allocation of shares to investors will be announced next Wednesday and the shares will be traded in Dublin, London and New York next Thursday, although it will be the following week before most shareholders receive their certificates and will be able to trade. The Government and its advisers are likely to debate the pricing intensely and there appear to be strong arguments emerging in favour of a price of around 290p, or possible even a couple of pence lower.
One of the main measures used to compare prices is price to earnings ratios (p/e). Stockbrokers have estimated that at the mid-price of the indicated share price range - 295p - the p/e ratio would be around 38.8 based on Telecom's results to April 1999. However, the figure could be estimated to be slightly higher, at around 42, when account is taken of the tax which would have been paid if certain exceptional costs had not been incurred and profits had been higher.
This prospective valuation compares to around 36 for the European telecommunications sector, providing an argument to price the figures at slightly below the mid-point level.
KPN - trading on a p/e itself of 23.7 - appears to have been aware of this factor. The Dutch group - and Telecom's other strategic partner Telia - ensured that, under a deal with the Government, the price they pay to increase their stake in Telecom from 20 per cent to 35 per cent will be based on the share price at flotation or the average market price for the three months before the transaction.
Telia is likely to sell its Telecom stake, but the formula shows that KPN has an incentive to argue for a lower float price. However, it also believes it might gain from a falling post-flotation price, if the shares are priced too expensively.
Those arguing for a share price below the mid-point 295p figure are also likely to point out that, on the basis of another measure of value - a calculation of enterprise value compared to earnings before interest depreciation and tax - a price of around 283p would put Telecom around the average of other major European telecoms groups. There are arguments for Telecom having a slightly premium rating - principally the strength of the economy here - but ministers will want a price which leads to a comfortable share price rise in the early days of perhaps between 10 and 15 per cent. This is likely to outweigh the traditional desire by the Department of Finance to maximise revenue by setting the highest possible price.
