Europe's Sell Off To End All Sell Offs

Huge stakes are riding on the fate of Deutsche Telekom

It was supposed to be a sure thing. In February, 1987, with the Tokyo stock market skyrocketing, the Japanese government sold 1.9 million shares of Nippon Telegraph & Telephone Corp. at $10,720 a pop. Armies of brokers pitched the stock to housewives and retirees. By October, 1988, they had sold 35% of the company. But two years later, the Tokyo stock market plunged, exposing NTT for what it was: an overpriced giant far less profitable than the global competition. Its market value has since halved.

The NTT debacle now is haunting a new army of brokers. State-owned German giant Deutsche Telekom aims to raise up to $10 billion by issuing some 500 million new shares in the world's second-biggest initial public offering after NTT. Lead managers Deutsche Bank, Dresdner Bank, and Goldman Sachs, as well as dozens of others in a sprawling consortium, are hitting the road to pitch the stock. The price will be set just before trading starts on Nov. 18.

The success of the T share, as it's called in Germany, will determine more than the company's near-term finances. German Chancellor Helmut Kohl wants Telekom stock to sow the seeds of a shareholder culture. If it's a flop, Bonn will have a hard time unloading other state-owned companies, such as the railroad and the rest of airline Lufthansa. And unless the public is persuaded that stocks are a good long-term investment, private pension funds will never fill the gap left by dwindling public benefits. "The real measure [of Telekom's success] will be if investors make real, hard money out of it," says Vicky K. Sleddon, fund manager at Mercury European Privatization Trust in London. "That depends on how it is priced."

Indeed, pricing the T share will be the most important decision Chief Executive Ron Sommer, formerly of Sony Corp., has made since taking over 18 months ago. Analysts estimate a range of $13.07 to $19.60. If Telekom presses its bankers to go for the high end, the issue could face the same fate as NTT.

The trouble is, Telekom wants a rich share price to help pay off its $64 billion debt, which is tops among European companies. But its bankers think it is more important to place the maximum number of competitively priced shares than to worry about the balance sheet. Consortium members say Telekom execs have been arguing for the higher end of the range, leading to heated talk and slammed doors.

TWO TIERS. Complicating the decision is that Telekom has to satisfy one set of investor expectations at home and another abroad. Risk-averse German fund managers, accustomed to bonds, tend to look at yield. They want high dividends to beat the 6% they can get for 10-year government debt. They also get a tax credit on dividend income. So they're willing to pay more for high-yielding stocks. U.S. and British investors focus more on growth and like buying stocks cheap.

In Germany, the stock is being marketed heavily to individuals--who the company hopes will absorb 40% of the offering--with everything from giveaways to giant billboards. But global institutional investors, who are expected to take at least 40% of the offering, are scrutinizing Telekom's performance. Among their biggest worries is the company's debt, incurred as Telekom rushed to bring eastern Germany up to speed. Robert Mocatta, a telecom analyst with BZW, a bank outside the selling consortium, noted in a provocative report that Telekom's debt is higher than Turkey's. Mocatta thinks a competitive price range would start at $6.50.

Some institutional investors won't be quite such a hard sell. Managers of specialized Germany funds can't ignore that Telekom will account for up to 4.5% of the DAX index and thus be a stock everyone needs to hold. But most global investors will stack it up against other telecom shares. There are plenty to choose from, especially in regions such as Latin America and Asia that have much more room for growth.

Certainly, Europe in 1996 is not Japan in 1988. Already, Telekom faces fierce competition in private networks and mobile phones and is preparing for full deregulation. It has powerful cash flow and state-of-the-art technology. But the lessons of NTT are clear. All the marketing in the world won't help unless the price is right.

Before it's here, it's on the Bloomberg Terminal.