Eircom shares rise sharply

A surge in European telecom shares following the collapse of the Italian third generation mobile phone auction has driven Eircom shares to their highest level for almost six months.

In Dublin, Eircom closed up 17 cents on €2.95 and was well-bid at that level. Even at this price, the shares are 25 per cent less than the €3.90 flotation price of July 1999. They are, however, 60 cents more than the €2.35 low of a few weeks ago before the Eircell/Vodafone speculation triggered renewed interest.

There was heavy volume in Eircom shares with the London market surprisingly the centre of activity in the shares, with 3.6 million shares trading. Volume in Dublin was 1.1 million.

The renewed strength of telecom shares will come as good news for Eircom shareholders, not simply because the value of Eircom shares has recovered. It will also allow the company and its advisers to press for a higher price from Vodafone for its Eircell mobile phone subsidiary.

It is widely expected that Vodafone will acquire Eircell in an all-share deal, so the higher Vodafone shares go, the higher the price that will be paid for Eircell. But Vodafone shares failed to match the rise in the rest of the telecom sector and closed just 3 1/4p higher on 284 1/2p sterling (€4.95).

This puts a value of almost €2.45 on each demerged Eircell share, based on the current euro/ sterling exchange rate and the one-for-two share swap that Vodafone has indicated it is willing to pay for Eircell.

Market sources have warned that Vodafone will be careful not to be seen to be overpaying for Eircell. The one-for-two swap could be modified if Vodafone's share prices rose significantly. A two-for-five swap would value a demerged Eircell at €1.95 a share, but market sources believe Eircom is unlikely to be happy with that sort of valuation for its most prized asset.

Analysts have valued Eircom's Internet business - to be spun off into a separate public company - and its fixed-line business at €1.90 a share. There is no guarantee, however, that these parts of the business would trade at this price.

In the past six months, Eircom has tended to trade at a substantial discount to its sum-of-the-parts valuation.

On European markets, telecom shares jumped on relief that Italy's third-generation mobile licence auction was over and had been less costly for telecom companies than investors had feared.

The auction, which flopped on Monday, was Europe's final, major auction of high speed licences. Earlier ones in Britain and Germany had cost the telecom companies far more than expected, leading to worries about future profits.

British Telecom, whose Italian partner Blu's withdrawal from the auction caused its early ending, rocketed 11.5 per cent and closed up 81p on 792p sterling.