KPN, Telia pick bad time to sell telecom stake

KPN and Telia, partners in the Comsource consortium, could hardly have picked a worse time to try and sell their combined 35 per cent stake in Eircom.

That unfortunate timing will mean that the Dutch and Swedish telecom groups will probably have to accept a very low price for their shares, with analysts believing that a price of at most €3.30 and possibly even €3.00 or less may be the final result.

KPN has effectively said it needs the money from its 21 per cent of Eircom to invest in third-generation mobile phone operations in Europe, while Telia apparently wants to sell its 14 per cent, not for any specific alternative investment but as part of a clearing-up exercise coinciding with Telia's own flotation.

There are a host of factors that make this a particularly poor time to try and sell such a large chunk of Eircom. For a start, the general attitude in the markets to the technology sector has turned much more bearish since the halcyon days of last July when Eircom was floated at a hefty premium to even telecom market heavyweights such as British Telecom, Deutsche Telekom and France Telecom.

It might not be a view shared by the Department of Finance, which exulted in the windfall the Exchequer received from the Eircom privatisation. But there is a strong view - albeit with the benefit of hindsight - that the Eircom shares were grossly overpriced last July, especially as the flotation was heavily targeted at private investors, many of whom were getting their first experience of the stock market.

From that hefty premium to its European peer group, Eircom shares have since turned turtle and are now trading on a significant discount to the peer group. That discount is likely to grow substantially by the time the book-building for the sale of the KPN/Telia stake is completed, and Eircom shareholders can only look forward to more pain before their situation improves.

Apart from a generally poor environment for telecom stocks, made worse by recent poor results from heavyweights like BT, the sale of the 35 per cent of Eircom is being introduced at a time when investment markets are literally awash with telecom paper as a result of the third tranche of Deutsche Telekom shares being sold - worth more than €11 billion - and the IPO of Telia, where almost €5 billion of the Swedish telecom group is being sold off.

Institutional investors faced with that sort of choice are likely to look first at the Deutsche Telekom and Telia offerings before they look at buying shares of a second-division player like Eircom. The fact that the shares are being brought to the market only because no trade player emerged to buy the 35 per cent stake is another negative for the shares, say market sources.

ABN-Amro analyst Ms Jemma Houlihan believes that a 20 per cent discount to the price in the market will be required if the shares are to find buyers. "It will have to be €3.30 or less if it's going to be attractive," she said. Ms Houlihan added, however, that the shares will probably bottom out at sale price for the KPN/Telia holding.

In the longer term, she believes that Eircom has no future as an independent entity. "In a few years there will be five big telcos across Europe. We'll be waiting for some of the larger players to consolidate first and Eircom is more likely to get taken out as an infill or second wave of the consolidation process," says Ms Houlihan.

NCB analyst Mr Robert Hussey is even more bearish and suggested that the final price for the secondary offering could end up below €3.00. "It will be at least a 1020 per cent discount off the market price. Even at these levels the share is not cheap as the whole telecom sector has come back," he said.

He added that the sale of the KPN/Telia stake is unique, as it will be the first time that a second tranche of a telecom company's shares will be sold below the original IPO price. "Our valuations see this going as low as €3.00," he said.

Merrion Stockbrokers analyst Mr John Coolican said: "The timing isn't great, the TMT sector is out of sorts and there's a lot of telecom paper coming on the market. The momentum is with those companies involved in European consolidation," he said.

He added that even at its current level Eircom is still trading on a higher enterprise value/EBITDA than some of its peers. "There's no great appetite for the shares," he said, adding that a price between €3.00 and €3.30 is likely. Mr Coolican, however, held out hopes for an Eircom link-up or partnership with a British mobile group like Orange, especially as Orange has failed in the courts to wrest the third mobile phone licence from Meteor.