Basic questions unanswered by MacSharry and his board

Time and time again the questions at the Eircom shareholder meeting came back to why the board of Eircom was so keen to sell Eircell. Every time the subject came up Mr Ray MacSharry referred to the reasons he outlined in his opening address. Put simply, the reason for the sale is that the opportunities for Eircell to expand outside of the Irish market are limited. In addition the company faces numerous strategic challenges which it can best meet as part of a large group.

The chairman listed a number of specific advantages that would accrue to Eircell, such as being allowed to offer an enhanced all-Ireland and all-European network.

Strong though Mr MacSharry's arguments may have been, they did not constitute a rebuttal of the simple logic behind shareholders' questions. They honed in on two simple issues. The first being why was the company going ahead with a deal that had been worth €4.5 billion when it was first agreed last December, but is now worth only €3.3 billion.

The board's continued enthusiasm for the deal seemed all the more strange - to shareholders - in light of the break clause that Eircom had insisted be included in the agreement. Under the terms of the clause Eircom would have incurred no penalty for abandoning the deal at the current Vodafone share price of £2.03 sterling.

Mr MacSharry's response, that Vodafone's shares had fallen in line with the market and €3.3 billion represented a good price compared to the valuations put on other European mobile companies, did not cut much ice with the shareholders.

They second point that the small shareholders kept coming back to was the failure of the board to negotiate a cash alternative for the all share deal. If cash had been offered in December, Vodafone would have been locked in at €4.2 billion. Instead the British group had insisted on an all share offer and then proceeded on a spending spree that significantly dilutes the value of its shares and thus the cost of the deal. This culminated last week in the £5.8 billion purchase of the Japanese and Spanish mobile assets of British Telecom.

The failure of the Eircom board to negotiate the cash alternative underlined the extent to which Vodafone held the whip hand in the negotiations. The British company had been in the driving seat pretty much since last autumn when it managed to force Eircom to negotiate exclusively with it despite not being prepared to first agree the price it would pay.

Mr MacSharry muddied the waters concerning the cash alternative yesterday by saying that the all share deal provided a tax efficient mechanism for shareholders. It was something of a red herring because - as one shareholder quickly pointed out - there would be no tax liability for the bulk of shareholders because they were making a loss on the deal.

Trenchant though Mr MacSharry's defence of the sale was, the small shareholders did not buy it. Not surprisingly they voted down the motion to demerge Eircell although it was later carried by proxies. Perhaps Mr MacSharry's problem was that the reasons he advanced for proceeding with the deal were in essence a rehash of why it made sense for Eircell to become part of Vodafone.

He might have been helpful explaining to shareholders why they would be better off as Vodafone shareholders rather than owning Eircell, via Eircom.

His problem was that his argument would have to be a corollary of why Eircell was better off being part of Vodafone. He would have found himself arguing that if Eircell remained in Eircom it would not be able to meet strategic challenges and thus become a drain on the group and eventually on the shareholders' funds. It would not really have been a ringing endorsement of his abilities, or those of the board or the company management.

Maybe Mr MacSharry had already sensed the mood in the room, which was sceptical about the merits of transferring to the Vodafone share register. Sentiment towards the British company is definitely turning amongst a minority of commentators. The recent Japanese acquisition may force Vodafone to take a significant amount of J-Phone's debt onto its balance sheet. This in turn will force the company to surrender the lightly borrowed tag that has separated it from its troubled peers, such as British Telecom and France Telecom. For the time being the group retain its single A, investment grade rating.

If you are about to become a new Vodafone shareholder you might prefer to focus on Goldman Sachs's prediction - as relayed to the meeting by Mr MacSharry - that the shares could reach £3.20 sterling in the medium term.