THE sale of a 35 per cent stake in Telecom Eireann to a strategic partner is another step towards enabling the company to survive as the Irish telecommunications markets opens up to international competition.
With Cabinet approval now given, the urgent job of selecting, a suitable partner and negotiating terms must proceed. The Government has promised that £220 million of the proceeds from the sale of 35, per cent, of the company will be reinvested in Telecom.
With its plan to reinvest £220 million in Telecom and to set off the balance against the Exchequer's estimated £250 million plus liability to the Telecom pension fund, the Government may be hoping for about £470 million for the 35 per cent stake. Market measures would appear to put a historic value of £300 to £350 million on the stake.
However, the potential for increasing profits at Telecom, together with a competitive bid situation and recent high prices for stakes in telecommunications companies, is expected to push the price close to the Government target.
Telecom is burdened with a debt of about £862 million which cost £78 million in interest payments last year. It needs to spend about £1.2 billion to bring equipment and services up to the standards which will be required in future years and its costs and prices are too high.
In the year to the end of March 1995, Telecom generated operating profits of £152 million on turnover of £979 million. Operating costs accounted for 58 per cent of turnover and accelerated depreciation accounted for 26 per cent of turnover. After financing costs the company generated net profits of £74 million.
Based on its historic performance and the extent of its debts, the value of a 35 per cent stake in Telecom could be as low as £300 million.
Potential bidders vying for a stake in a company will look at the future profit outlook. With plans to reduce costs, a low penetration in the mobile phone market and the restructuring of the balance sheet there is potential to increase profits significantly.
Calculating a valuation for Telecom is complicated by its high debt level - borrowings are about twice the level of shareholders' funds. To form an initial valuation, a potential purchaser would have to look at profits before interest costs to put a value on the company.
British Telecom could be used to establish an earnings multiple. Based on its market capitalisation of about £23 billion sterling, historic profits before interest of £2.3 billion and debts of, about £3 billion, British Telecom is trading on a historic multiple of 11.2 times pre-interest earnings. Based on this multiple and allowing for its debts of £860 million, Teleeom Eireann would be worth about £850 million, valuing a 3,5 per cent stake at Just over £300 million.
Other measures including cash flow multiples and value per line can be used to arrive at final valuations. But recent sales of stakes in telecommunications companies have taken place at high multiples, based on the opportunities for improving efficiencies and increasing profits.
