Potential shareholders who registered their interest in acquiring shares in Telecom Eireann now have to decide whether to go ahead and buy the shares. Some 1.2 million people out of the 2.8 million on the electoral register signalled their interest some weeks ago in advance of the Initial Public Offering (IPO).
To help accommodate the huge level of interest, the Government has now decided to sell its entire 50.1 per cent stake in the company, a total of 1,080 million shares. The shares are being offered to private and institutional investors.
Private investors will be offered at least 40 per cent (432 million shares) and possibly up to 60 per cent of the Government's shares. Most potential shareholders in Telecom Eireann should by now have received their mini-prospectus and the application form to apply for shares. This must be completed and returned by June 30th together with payment for the number of shares applied for.
The shares will be priced between £2.64 (€3.35) and £3.27 (€4.15) each, with the exact price to be announced on July 7th. Shareholders will get statements from about July 14th telling them the allocation they have received.
Questions And Answers:
Should I buy?
Telecom shares are expected to perform well on the stock market immediately after the flotation for two reasons:
The first is that because demand will greatly exceed supply institutional shareholders, like the big pension and investment funds, will not get the number of shares they want when the Government shares are allocated. So they are expected to come into the market to buy shares after the flotation which will push the price up.
The second reason is that Telecom shares represent both exposure to the booming Irish economy and to the highly popular and rapidly developing telecommunications sector, making them an attractive investment for many shareholders.
But there are threats too for Telecom which could put downward pressure on its share price. These come from the deregulation of the Irish telecommunications market and the danger from new, aggressive competitors.
If the shares are expected to do so well, why is the Government selling its full stake?
The initial decision to sell some of its stake in Telecom was taken to raise cash and to allow Telecom to take in new shareholders who would be prepared to provide the capital required for its future growth and development. The later decision to sell its full stake was taken in response to higher-than-expected demand for the shares, according Ms O'Rourke, the Minister for Public Enterprise.
How do I go about buying?
If you registered an interest in buying the shares some weeks ago when all 2.8 million people on the electoral register were invited to register, you should in the last few days have received the application form to apply for shares. You now need to complete that form stating the amount of money you wish to invest in Telecom shares and return it with the appropriate payment for the shares by Wednesday, June 30th.
How will I know how much to send in with my application if the price will not be decided until July 7th?
You do not need to know the price in advance. The form is structured so that potential shareholders apply for shares according to the amount of money they want to spend. You can apply for £250 to £100,000 worth of shares, but only for specified amounts. These amounts are specified in the form: £250, £300, £400, £500, £600, £700, £800, £900, £1,000, £1,250, £1,500, £1,750, £2,000, £2,500, £3,000, £4,000, £5,000, £7,500, £10,000, £15,000, £20,000, £25,000, £35,000, £50,000, £75,000, £100,000.
Can I still buy shares even if I did not register?
Yes, in theory. You can go along to any branch of AIB Bank, collect an application form and send it in. But you are unlikely to get any shares because you will only rank for shares after the allocations of those who took advantage of the priority registration. If the demand for shares from those who registered is as strong as expected there are unlikely to be any shares left over for late applicants.
How many shares should I buy?
That depends on your attitude to risk. While analysts generally expect the Telecom share price to rise there is always the risk that it will not, or, that the current strong stock market could change and the share price could fall. In general, it is good advice when buying shares not to put in more than you can afford to lose.
In the case of Telecom an investment looks like a good bet at the moment. But you must judge the extent of your investment according to your personal circumstances. And don't forget that you have to take dealing costs and possible tax implications into account in calculating any potential gains.
How many shares should I apply for?
More than you want. Because demand for the shares is expected to be well ahead of supply available, the allocation to each applicant will be scaled back. There is no information yet on how this scaling back will be done - it can only be decided when the final level of demand is clear. But it is expected to be biased in favour of the smaller investor.
What does a scale-back mean?
It means that most potential investors will not get the number of shares they want to buy. But the allocation of the available shares is expected to be biased in favour of people who apply for smaller tranches of shares.
For example, people who apply for, say, up to £2,000 worth of shares may get all the shares they have applied for while people who apply for £100,000 worth of shares could end up with 20 per cent or even less of the amount applied for.
In the Norwich Union flotation people who applied for £100,000 worth of shares got just 10 per cent of that amount. There is no way of knowing at this stage how severely the applications will be scaled back, or where the cut-offs in favour of smaller investors will be.
How will I fund a purchase of shares?
Given the very low return at present on savings, the first place to look for funds should probably be your savings account. But be very wary of using your entire savings to buy shares because there is always the risk with shares that you could lose as well as gain and, depending on your circumstances, you may need to maintain some savings in order to have ready access to liquid funds. Or you could take out a loan from your bank, building society or credit union to buy shares.
Should I borrow?
It depends on your circumstances. Whether the shares rise or fall, interest will have to be paid and the loan will have to be repaid. You will have to borrow the full amount to cover the shares you have applied for in time to pay by the final application date - June 30th. You will not know until July 14th what allocation you have received.
Then it could be a week or more before you get a refund of the amount not needed following the scale back. At that stage some of the loan could be repaid.
Most banks are quoting variable rates of between 8.5 per cent and 10.5 per cent on loans to buy shares. It is important to ensure that the loan you get is flexible and allows for the early repayment of the borrowed funds that are returned to you after the scale-back.
If you borrowed £2,000 at 8.5 per cent through either the Bank of Ireland or the AIB special share loan packages and got your full allocation of shares the loan repayment cost would be just more than £174 per month over a year. Therefore the shares would need to rise by just under 9 per cent over the period just to break even before any dealing costs.
Can I pay by instalments?
]No. When British Telecom was privatised in 1984, shareholders could pay 50p of the £1.30 sterling share price on application, followed by 40p five months later and the final 40p some 10 months later. But Telecom Eireann shareholders will have to pay the full price on application.
How should I pay?
There are a number of options. You could send in a cheque, bank draft or postal order with your application. But the best option, if you have a bank account, is to use a direct debit because the amount will not be debited from your account until the last day of the offer period - June 30th. And the refund, if the offer has been scaled back, will be credited directly to your account about two weeks later.
But remember that the full amount you have applied for will be debited from you account on June 30th, so ensure that you have sufficient funds in your account to cover your application. There will be no second chance - if your direct debit, or, your cheque or draft, bounces, you will get no shares.
Can I apply for shares in the names of my children?
Yes. Shares bought for minor children will be beneficially owned by the child, but the parent or guardian will be deemed to be the legal owner and will therefore be the person liable for any income tax or capital gains tax arising on the shares.
How long would I need to hold the shares to make a profit?
Market analysts expect an immediate rise in the share price when trading begins. They say that the share price in the initial public offering will be set to ensure a rise of 10 per cent or more in early trading. There will be demand for the shares from institutions who will not have received the allocations they wanted to balance their portfolios in the allocation. In the medium to longer term the outlook for Telecom shares will depend on developments in the telecommunications sector and on the general state of the stock market.
Is there any tax relief or other incentive from the Government for buying the shares?
Afraid not. There are no tax reliefs or incentives offered, though there is a bonus offer to encourage investors to hold on to their Telecom shares: retail investors who retain their shares until July 7th, 2000, will get one bonus share for every 25 held.
But there is an incentive, though it will not come from the Government, in the likelihood that the share price will rise on the stock market giving investors the chance of a capital gain.
What are the tax implications?
There are two. When the company pays a dividend, usually twice a year, the shareholder must declare that dividend as income in their income tax return and it is liable to tax at their marginal rate. And, if a shareholder sells shares there may be a liability to Capital Gains Tax. This would be based on the difference between the price at which the shares are sold and that at which they were bought. In the current year, an individual shareholder could make a capital gain of £1,000 before any tax will become due. Any gain over £1,000 is liable to tax at the CGT rate of 20 per rate.
How easy will it be to sell the shares and what will it cost?
It will be very easy to sell. There is expected to be a good level of unsatisfied demand from institutions for the shares. Shareholders can sell through stockbrokers or can go to an AIB, Bank of Ireland, or Ulster Bank and will be referred to their stockbroking subsidiaries. Shareholders can opt in their application forms to take either share certificates or to hold their shares in the Telecom Eireann nominee account which will be managed by Goodbody Stockbrokers with all other stockbrokers and the banks invited to participate.
Stockbrokers are currently assessing how much to charge clients for buying or selling on their behalf. One broker said his firm would charge a flat fee of 1 per cent of the sale value, but better deals are expected to be announced nearer the flotation date.
Will my telephone bills be cheaper if I am a shareholder?
No. Shareholders are not being offered any special concessions from the company.
