Q & A

Telecom flotation

Coming from the North of Ireland and not having an address in the Republic, I couldn't register for the Telecom flotation. Does this mean that I cannot buy shares in the initial public offering (IPO)? Do I have to use a stockbroker to buy shares when they become available on the market, or can I still get a form from a Telecom Eireann shop to buy shares before they are floated?

Mr N.C., e-mail

As you say, not having an address in the Republic precluded you from registering. This was contrary to the initial aim of the Government which, for political reasons, wanted to extend the offer island-wide. However, it was advised that doing so would have triggered a full flotation process in the UK as a whole and it decided that such a move would be counter-productive, effectively reducing the number of shares being held by Irish residents and Telecom Eireann customers.

Despite being excluded from pre-registering your interest in purchasing Telecom shares, there is nothing stopping anyone applying for shares in the initial public offering (IPO) - or flotation. The only restriction is that the shares must be paid with funds drawn on an Irish bank or building society account or An Post. Having said that, it is unlikely that anyone who was unable to register will be successful in receiving shares. This is because those who registered have first claim on the issue. Only if the offer is not oversubscribed by this group will there be shares left for other applicants. Given that 1.2 million people registered their interest, it is unlikely there will be any shares left after catering for these priority applicants.

Assuming a selling price of £7 billion, is the Telecom Eireann privatisation a good investment? Given the price and taking annual profits to be £150 million, Telecom Eireann will have a price/earnings ratio of 47. This does not compare favourably with British Telecom, for example, which has a price/earnings ratio of 31.

Mr G.M., e-mail

The first thing to point out is that this column is neither capable not entitled to give investment advice to readers. There are a host of professional financial advisers out there, properly licensed and authorised by the appropriate regulators to give such advice. What this column can do is point what one might consider or the situation with regard to tax or the law.

Determining whether Telecom is a good investment depends on a number of factors, including:

individual investment requirements, including investment term;

attitude to risk;

assessment of the sector, domestically and internationally.

For instance, it is likely that Telecom shares will rise initially, if only because institutions and fund managers will be short of the stock which is likely to account for 10 per cent of the Irish Stock Exchange index. Many will be looking to replicate this percentage in their funds and will have to buy to do so.

In the longer term, it is impossible to say with certainty. History shows that stocks, as an investment, have risen faster than other forms of investment over the long term. However, the investor needs to recognise the fact that shares are subject to volatile price movements.

For this reason, people who might need access to their investment in a hurry - and not necessarily at an appropriate moment in the cycle - should think twice before putting all their eggs in one basket. Similarly, some people are simply not comfortable with risk and, have no doubt about it, stock exchange investment is a risk.

In relation to studying the sector, it does appear just now that the outlook for the telecoms sector is bright. Technological innovation is placing greater emphasis on this area than many others and the profits foreseen by some in telecoms offshoots such as e-commerce are huge.

One of the elements to consider when comparing stocks within a sector is the price to earnings ratio - that is the price of each share and a multiple of the earnings per share. But it is not the whole story. One needs to look behind the figures to see if an individual outfit's price/earnings ratio is higher because the company is investing heavily in the future (lowering profits and raising the ratio) or cutting costs (raising profits and lowering the ratio) all other factors being equal.

In the case of Telecom Eireann, it seems likely that the unprecedented demand for the share, together with the bull market, accounts for a large measure of the apparently inflated price/earnings ratio when compared with, as in your example, British Telecom.

If demand for the share continues to be as bullish as many analysts predict, at least in the short term, this might indicate a higher price/earnings ratio for the stock than might otherwise be the case.

Everyone is talking about the cost of dealing in Telecom Eireann shares. I know there is no cost in buying the shares - apart from the cost of the shares themselves - but what are the costs involved in selling?

Ms A.D., e-mail

It is an illustration of how cloistered the world of shares and share dealing has been until now that so many people appear to be nervous of the process and costs involved in selling shares. The mystique has been somewhat dispelled by other recent floatations, notably Irish Permanent, Norwich Union and First Active. Hopefully, the privatisation of Telecom Eireann will help further.

In general, shares are sold on behalf of the customer by a stockbroker. There are a large number of these around, mostly based in Dublin, where the stock exchange is also situated. Some are subsidiaries of the banks - Davy (Bank of Ireland), Goodbody (AIB) and NCB (Ulster Bank) - but many others are independent.

While there is a lot of competition between brokers, it is well worthwhile shopping around for the best quote before selling your shares. A straw poll of the main brokers this week showed that most charge a percentage of between 1.5 and 1.65 per cent on transactions up to £5,000, Depending on the broker, the rate can then fall as low as 0.5 per cent.

However, all brokers charge a minimum flat fee to ensure that there is some margin of profit in transactions involving the sort of small amounts of shares that many people in Telecom may eventually hold. These flat fees seem to range from £20 to £60, so it is well worth checking several brokers out before making any move.

The figures quoted above are for general share transactions. It is certain that most, if not all, the brokers will have special deals available on the sale of Telecom shares. For instance, one broker, which normally charges a £40 minimum fee on transactions, anticipates the minimum fee on Telecom share sales will be below £10, at least in the early days.

One other thing to bear in mind is that you should not judge stockbrokers by commission alone. The standard of the service your are paying for is important.

Please send queries to Dominic Coyle, Q&A, The Irish Times , 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.