Eircom flotation to do well short-term

SHORT-TERM the markets expect the Eircom flotation to go well.

The company will float at the mid price of €1.6 a share, analysts said.

That makes the price attractive, said one Dublin senior fund manager who wished to stay anonymous.

However the real question is “why are the shares being sold at such an attractive price?”

He offered several reasons. Earnings going forward will be limited. It is likely the company will see revenues decline in the years ahead due to competition and slowing demand.

If it is to pay the 7% plus dividend, that will restrict investment.

Eircom says it will invest €200 million per annum in the coming years to build up its infrastructure.

Some analysts suggest this is inadequate and will further undermine the group’s performance.

Eircom will also face pressure to open up its fixed line services to more competition.

Its debt equity ratio is about 600%, when 200% is much closer to the norm.

Furthermore, the group is unlikely to enter the mobile phone market in the short- term, thereby excluding itself from what is seen as the segment of the market with greater growth prospects.

All of those points raise basic questions about the future of the group to deliver value to shareholders long-term.

The Dublin fund manager’s group still has to make up its mind about getting involved, he said.

The stock is attractive due to the low price and the dividend on offer, but “the question we are asking ourselves is whether it is worth taking the risk given the large negatives surrounding the future outlook for the group,” he said.

Philip Carney of Hibernian Investment Managers said that “short term I think Eircom is very attractive”.

HIM is a leading institutional investor in the Irish market. Carney added: “It’s not a very exciting story so you’ve got to make it attractive on a yield basis. I think it’s priced to go.”

“Why should this flotation be a success, given it has been a disaster from the time of its initial flotation back in July 1999” was the basic reaction of a Dublin analyst who also wished to remain anonymous.

What has changed in the meantime? “If anything the market outlook has become more depressed and the high dividend and the low share price reflect that. It raises the fear this is unlikely to be a good story for investors long-term, he said.

Also with the Employee Share Ownership Trust (ESOT) controlling 30% of the equity, it limits prospects of an early sale for investors once it floats.

Given the long list of negatives, outline high trading levels in the stock in the months ahead are forecast as investors capitalise on any short-term.

This is known as “stagging” where people buy for short-term and take their profits when the market is still bullish.

While the investment may be good in the short-term pension funds could avoid the stock. The anecdotal word in the market is that Irish interest is limited.