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The Anglo File: Kingston IPO Puts Hull on the Map

The public offering of this municipally owned telecom company sparks plenty of interest, especially among Hull residents.

The city of Hull in the U.K.'s Midlands region wouldn't typically jump out as being

the

place to invest. But then, until recently, not many investors had heard of

Kingston Communications (Hull) PLC

, a municipally owned telecommunications company that will float itself next month.

Kingston is a little quirk in the U.K.'s telecom history. In 1902,

Hull City Corp.

was granted a license to operate a telephone network in the Hull area. Since then, it has renamed itself and grown into a modern integrated telecom group with the city council as the sole shareholder. All that will change July 9, when the council sells a 50.1% stake in Kingston to the public. The result is expected to be a company with a market value of about $1.3 billion.

A Star Is Born

What makes Kingston worth so much? Well, if you believe the hype, it could be the next

Colt Telecom

(COLTY)

, a London telco that's seen its share price rise 366% since it went public three years ago, though it's never actually turned a profit.

There are three main parts to the Kingston group:

Kingston Communications

, which provides the local network in Hull;

Torch Telecom

, a business telecom provider; and

Kingston-TLI

, a satellite network operator.

Of those, Torch Telecom holds the most promise. Torch saw a 58% rise in its sales in the half-year ended Sept. 30, and the company has bought fiber-optic networks in three regions of southwestern England to offer similar services to small and medium-sized businesses there.

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Kingston has already rolled out its commercial high-speed Internet asymmetric digital subscriber line service, which allows it to pump more data through its telephone lines to the existing Hull network and to the surrounding East Yorkshire region.

British Telecom

(BTY)

, on the other hand, has yet to do this and offers its customers a slower service.

Despite these large-scale investments, Kingston is profitable. In the first half of this fiscal year ended Sept. 30, Kingston's revenue rose 17.4% to $118 million, and operating profit increased 10.6% to $15.9 million.

In the short term, profits are likely to be curtailed as the firm invests more money to expand its network in adjacent areas, but its business plan involves a lot of value-added services. For example, Torch is planning to add one new network per year through 2004, and Kingston is currently testing video-on-demand services in the local area.

The icing on the cake is that Kingston is being sold at a very reasonable discount to other telcos in the U.K. The price of the offering is in a band of 175 to 225 pence. This looks very attractive, as the midpoint price would give a trailing price-to-earnings ratio of around eight times, compared with 34 times for British Telecom.

Left Out in the Cold

The bad news for investors is that they are unlikely to get even a sliver of the pie. The 430,000 residents of Hull will get priority in the retail offer. According to Robert Hughes of the local stockbroker

Redname Bentley

, there have been about 50,000 applications for IPO information packs.

"That's a conservative estimate, and it's probably more than that," Hughes says. Of course, not all those people will buy shares, he adds.

Still, it's expected that interest is great enough to push the price of the shares to the higher end of the band.

Although Kingston is aware of the political considerations of what is essentially a privatization, it is likely to allow underwriters

Deutsche Bank

and

Andrew Fleming

a free hand in giving out the rest of the shares to institutions in Europe and the U.S. Kingston, citing a mandatory

Securities and Exchange Commission

quiet period, declined to comment.

Not surprisingly, the council is unlikely to start selling off its 49.9% stake anytime soon, given the interest that the flotation appears to have generated and the bull market in telecom stocks.

The flotation of Kingston will bring an end to a 97-year anomaly in the British telecom sector. For investors, it's a shame that there aren't more such oddities around.