Strong demand likely for Telecom Eireann

The announcement of an international link between British Telecom (BT) and the US international carrier AT & T led to an immediate surge in the share prices of BT. The deal, followed rapidly by news of the proposed Bell Atlantic and GTE merger, underlines the pace of change in the world's telecoms markets.

Because of the size and international reach of BT and AT & T, their joint venture will have far reaching implications. They anticipate that the joint venture will turn over $10 billion (£7.1 billion) in its first year with operating profits of about $1 billion. The joint venture will operate a global data communications network, provide services to multinational customers, and run international telecom systems owned by its parent companies.

Providing technologically advanced services to multinational companies is the key to the venture's success. With more than 40 per cent of multinational companies' headquarters in the US, AT&T provides tremendous access to the US market.

The BT/AT & T deal was made public just as the Government announced the awarding of its mandate for the initial public offering (IPO) of Telecom Eireann. Merrill Lynch and AIB Capital Markets won the lucrative contract and a flotation date in mid-1999 is now likely. Given the pace of technological change and the pace of globalisation in world markets privatisation of Telecom is essential.

The Government is very late in this regard in that virtually all of Europe's previously nationalised telecoms companies are now either fully or partially privatised.

The Telecom Eireann flotation will be the largest issue ever on the stock market. Perhaps of even greater significance is that it will create a huge new army of shareholders. Experience from other countries shows that special offers to customers and the issue of bonus loyalty shares does create a new base of small private investors. For the Irish public the Telecom issue is likely to overshadow anything seen previously during the Irish Permanent and Irish Life issues.

There is likely to be strong international and domestic demand for Telecom Eireann. Ireland's telecom market is relatively undeveloped creating a significant opportunity for Telecom.

The proportion of the Irish population with a fixed wireline connection is 41 per cent compared with a figure in excess of 60 per cent in some European countries.

Government initiatives to promote development of the Internet and electronic commerce sectors will also have a positive impact upon the Irish telecommunications sector, creating further opportunities for Telecom.

Meanwhile, in the cellular sector recent growth has been rapid and there is still substantial scope for growth. Although the numbers of people with mobile phones is now up with many European countries, mobile phone penetration in Ireland is still far below Scandinavian levels.

Telecom is still a relatively high cost operator. It has only 136 lines per employee compared with the European average of 250 lines per employee while in the US some operators exceed 400 lines per employee.

However, Telecom has signed an innovative restructuring agreement with its unions providing for a 20 per cent reduction in the workforce over the next five years. Part of the incentive agreement for employees involves an Employee Share Ownership Plan through which employees will be able to purchase up to 14.9 per cent of the company's equity.

The combination of rapid economic growth in the Republic combined with improved productivity should enable Telecom to grow its revenues steadily over the medium term. However, up to now it has operated in a regulatory environment which has been very favourable.

Within a short space of time the Irish telecom market will be fully liberated and this will create a much tougher overall competitive environment.

A further issue for Telecom Eireann is the fact that it is a small operator in an international context. The alliance with KPN of Holland and Telia of Sweden which together own 20 per cent of Telecom Eireann provides some international benefits.

KPN and Telia have an option to increase their stake to up to 35 per cent. Given the rapid pace of change in the global telecom market some form of link with one of the giants of the industry must be something which will have to be considered by Telecom in time.

Depending on the eventual value placed by the market on Telecom, it will rank as one of the largest Irish publicly quoted companies. Its share register is likely to include a significant number of overseas shareholders comparable with the current position of many other large Irish publicly quoted companies.

What will distinguish Telecom is that virtually every customer in the State will have the option of buying shares in the company (probably at a discount to the institutional price). While many private shareholders will sell their shareholding immediately onto the market, many will hold their shares for the long-term. Therefore, the Telecom Eireann IPO could well be a watershed in broadening interest among private investors in directly investing in equities.