At least 50 countries are hoping to sell shares in their state-run telephone monopolies over the next 12 months. Judging by the success of recent transactions in developing countries such as the IPOs of Poland's TPSA and Estonian Telecom, they should not have much trouble finding buyers. But strategic and portfolio investors are getting pickier and vendors may need to lower their valuation targets.
SINCE the UK government began to sell off shares in British Telecom in 1984, hundreds of billions of dollars of state owned telecommunication assets have been transferred to the private sector.
But if you thought the privatisation bandwagon was running out of steam, think again. Over 150 countries still own stakes in their former telephone monopolies. In the former Soviet Union, the process has yet to pass the halfway point. In Africa, it has barely even begun.
"There are a huge number of shares still waiting to be sold," says Simon Linnett, head of the privatisation team at NM Rothschild.
For obvious reasons -- such as pressure to improve local networks, and the need for lower budget deficits -- many governments are looking to offload their telecom holdings as soon as they can.
As a result, the pipeline of future telecom privatisations is looking extremely crowded. Bulgaria, Colombia, Ecuador, France, Gabon, Germany, Greece, India, Indonesia, Ireland, Jordan, Kazakhstan, Kenya, Korea, Madagscar, Morocco, Nigeria, Poland, Saudi Arabia, Turkey, Uganda and Zimbabwe -- to name but a few -- are all planning to sell telecom shares this year.
Fortunately, not all of these shares will be sold in the public markets. Many countries (such as Bulgaria, Jordan, Madagscar and Kazakhstan) are looking for strategic investors. Some may decide (as Poland did in 1998) that they will attract more bidders by doing an IPO first.
But few investment bankers believe an IPO from central Asia, Russia or sub-Saharan Africa would be possible in the current market conditions. "Even if you could get the accounts in some sort of order, I can't imagine many investors buying the story," says one banker.
Nevertheless, there are still a large number of western European countries looking to sell shares. First in queue -- according to James Leigh Pemberton, head of equity capital markets at Credit Suisse First Boston -- are Telecom Eireann, Deutsche Telekom, Matav (the Hungarian operator) and OTE (the Greek telco).
So what valuations are such vendors likely to achieve? Broadly speaking, the price paid for telecom privatisation shares has risen considerably since the mid-1980s (when the first deals were launched).
At the same time, competition between international telecom companies to snap up the best assets has pushed up prices. In October 1998, for example, Telecom Italia was forced to pay $2.38bn for a 25% stake of Telekom Austria after stiff competition from Ameritech.
Whether the countries looking to sell this year will be able to achieve such high prices remains to be seen. According to many corporate financiers, interest in former state monopolies among strategic buyers (such as Telefónica, Deutsche Telekom and Cable and Wireless -- many of which have been keen buyers of such assets in the past) is falling.
"Most of the state companies have copper networks which are not as well suited to dealing with data traffic as fibre-optic cables," says one investment banker. "Meanwhile, most consumers are shifting to mobile phones anyway. Quite a lot of companies are asking 'why do we need more copper?'."
At the same time, the theory that companies can build regional networks by purchasing stakes in state owned companies is fast going out of favour. OTE, the Greek telecom company, is still plugging away -- buying stakes in telcos in Serbia, Romania and Armenia.
But most other companies (such as BT which has stated publicly its lack of interest in such assets) are focusing on mobile licences and internet companies.
Evidence in this shift can be seen in the disappointingly turnout at the recent auction for the Bulgarian telecoms company -- just one consortium (comprising KPN and OTE) put in a bid.
Partly because of this reason, many of the sales scheduled to take place this year may be delayed. "Although some vendors are beginning to take a more realistic approach to pricing, many still have over-optimistic ideas -- often put in their heads by rogue investment bankers looking to win a mandate -- about how much their telecom companies are worth," says one corporate financier with extensive experience of the former Soviet Union.
Ukraine, for example, is believed to be looking for $4bn for Kurtelekom. The 51% stake in the Bulgarian telco was initially priced at an estimated $1bn. Meanwhile, Jordan was reported to be looking for $2bn for a 40% stake in the Jordan Telecommunications Company.
That said, portfolio investors seem keener on telco stocks than ever before. But syndicate heads warn that, with many quoted telecom stocks now standing at historic highs, vendors attempting to sell at a premium to comparable shares already listed in the market may run into difficulties.
As in every other area of the international capital markets, the quality of execution can make all the difference between success and failure. But if the timing is particularly bad, even good execution cannot save you.
Look at what happened to the Swiss government last year, when it decided to float 30% of Swisscom in a falling market. "We had originally been looking at a price of around Sfr410 a share," remembers one banker involved in the deal. "But the markets fell so sharply during the bookbuilding period that we had to sell them at Sfr340." The net loss to the vendor (which received Sfr5bn for the stake) was around Sfr1bn. *