Even At High Levels, Esat Bonds Have More Potential Upside: European Portfolio Managers Not As Sophisticated As Their U.S. Counterparts, Says One Market Observer


Ireland-based Esat Telecom Group has been on a wild ride over the past few months, rewarding some high yield investors with a 20% gain in just a few days - provided they bought and sold at just the right time. But over the next couple of months there may still be five or six points of upside left on the bonds that many in the market have ignored.

And, according to one portfolio manager in the U.K., the problem stems from the lack of expertise on the part of many of his European colleagues.

Despite the growing market and the exploding enthusiasm in Europe for high yield, the buy-side still simply isn't as sophisticated as its U.S. counterpart, the investor said. And that's especially true when it comes to cross-over situations, which this has become, where investment-grade buyers need to look at high yield and vice versa.

The six points of potential upside on Esat's bonds, if it happens in the next couple months, as predicted by the buy-sider, is equivalent to about a 30% annual gain.

"How can you not take that... I can see leaving one point on the table because of the risks, but not six (points)," he said.

Esat has a 175 million euro issue outstanding as well as two U.S. dollar issues, worth about $280 million combined.

Last week, after a tumultuous ride through the capital markets, Esat agreed to be bought by investment grade British Telecom for nearly $2.5 billion. The Esat bonds were trading at 124 at the time. But if the deal goes through, the outstanding Esat bonds either will be tendered by British Telecom, or they will be assumed by BT. And either way, they will receive a shot in the arm to levels close to 130, the market observer said.

Esat officials could not be reached for comment by press time.

At some buy-side shops in the U.K., the pros simply aren't used to seeing high yield paper get bumped up to the investment-grade arena and that's causing some of the trouble in evaluating the notes.

A Deal In The Making

The whole hubbub started late last year when Esat was said to be a take-over target by Norway-based Telenor AS and Sweden-based Telia AB (HYR 12/06/99 p.1), which were themselves planning to merge to create the Nordic region's largest phone company.

The bonds of Esat shot up on the news to about 122 from the pre-announcement level of 108.

But the hostile takeover of Esat fell apart in December when Telenor and Telia's planned merger came unraveled, and Esat's bonds fell down to about 111 to 112, sources said.

Later, Telenor came back and made another proposal by itself to acquire Esat for $1.6 billion, which was subsequently dwarfed by BT's proposal just last week.

Sources were somewhat skeptical at the time that the Telenor/Telia acquisition of Esat would go through as planned, but several analysts said that Esat would represent an attractive target for other possible suitors if that were indeed the case. In fact, some even heralded it as the breakthrough deal in European telecom that the industry needed in the logjam of mergers and acquisitions.

One reason Esat was particularly attractive was the simple geography, and the fast growing Irish telecom market.

Ireland has one the most vibrant economies in Europe, analysts said, with about a 9% growth in 1999, compared to a growth of just over 2% for most of Western Europe. And the Irish wireless sector is especially bright. That's because only one in three people have wireless phones, compared with the one-in-two ratio in Telenor's and Telia's Nordic home countries.