Distant battles can affect Irish shares

The extent to which developments in the wider European markets are now such an important influence on the Irish stock market are certainly to the fore this week.

Just as the bidding war for NatWest bank draws towards a conclusion, the French cement maker Lafarge, announced a hostile bid for Britain's Blue Circle Industries.

Concurrently, Vodafone's mega-bid for Germany's Mannesman is moving towards an end with Vodafone tipped to emerge victorious.

The Irish banking sector, CRH and Eircom all have the potential to be affected by the outcomes of these three takeover battles. The significance of this for the overall Irish market is highlighted by the fact that the aggregate value of the Irish banks, CRH and Eircom amounts to approximately 55 per cent of the total market capitalisation of the ISEQ.

Of these three corporate battles, the Scottish banks attempt to take over their larger English rival has the most obvious impact on the respective Irish sector. This is not just because the fate of Ulster Bank hangs in the balance. Clearly, if Ulster Bank is sold it creates the opportunity for Irish Life & Permanent in particular to achieve critical mass in terms of size and range of products/services.

On the other hand, if Ulster is not sold it will have implications for the overall competitive position of the entire marketplace adding another twist to competitive pressures. Indeed, Ulster Bank itself could then become the predator in any further consolidation within the sector.

For investors in financial shares the battle for NatWest provides some salutary lessons for the future direction of bank share prices. Despite the fact that there is a competitive hostile bid situation, the NatWest share price is still languishing around £12 sterling (€20) compared to its recent high of £15.50 sterling.

Establishing the "true" value of the offers from the two Scottish banks is extremely difficult given the complex mixture of shares, cash and loan notes in both offers. Nevertheless, the share price value of each offer would seem to be around £14 sterling and clearly suggests that the market is still attaching quite a high probability to NatWest maintaining its independence.

With the share prices of Irish financials languishing at more than 40 per cent below their peak levels, many investors must be hoping that merger and acquisition activity will come to the rescue. Unfortunately, if the NatWest experience is anything to go by, even a keenly contested takeover battle is unlikely to return the shares to their previous peaks. Shareholders in NatWest have until February 14th to make up their minds.

For investors in CRH the news is much better and the Lafarge bid for Blue Circle is likely to generate a sustained improvement in sentiment towards the sector. There would not seem to be any immediate direct impact on CRH's underlying business although this bid could act as a catalyst for a more intensive period of consolidation across the sector.

In the telecoms sector, Vodafone's bid for Mannesman seems to be heading towards a victory for Vodafone, and assuming that the deal proceeds it will mark a watershed for cross-border corporate activity in Europe.

Vodafone has been mentioned as one of the possible interested parties in the KPN/Telia stake in Eircom. Given Vodafone's focus on mobile telephony it would have been seen as an unlikely buyer of the Eircom stake. However, Vodafone/Mannesman would have both mobile and landline interests and Eircom may then be viewed as a useful in-fill acquisition.

Whatever is the eventual outcome of these various European corporate battles, all investors in the Irish market will be working overtime to assess the implications for the relevant Irish stocks.