Rival bid would boost Eircom's price

Since the beginning of the year, long-suffering Eircom shareholders have continued to witness an ongoing lacklustre share price performance, and the current value of Eircom shares remains well below the flotation price. This is in spite of the fact that the sale of Eircell to Vodafone is likely to go ahead and the reemergence of Denis O'Brien's eIsland group as a serious bidder for the remainder of the group.

The weakness in Eircom's share price can be largely explained from an analysis of the accompanying table, which shows the year-to-date share price performance for several leading European telecom companies. The share prices of telecom stocks have remained under pressure since the beginning of the year and it is notable that it is the more highly rated mobile assets that have been under most pressure.

An illustration of this is the divergent returns from Portugal Telecom and Telecel, which is a pure mobile Portuguese telecom company. Since the beginning of the year Portugal Telecom's share price has risen by 11.9 per cent, compared with an 8.1 per cent decline in Telecel.

Vodafone, the world's largest mobile phone company, has seen its share price decline by 8.4 per cent, compared with Deutsche Telekom's share price, which is virtually unchanged. The price of France Telecom shares has declined by 10 per cent, largely due to the difficulty that the company is experiencing in floating off its mobile subsidiary, Orange.

Therefore, the decline in Eircom's share price since the beginning of the year of just under 6 per cent is consistent with Eircom now being viewed as primarily a mobile telephone company. The agreement to sell Eircell to Vodafone in an all-share deal implies that approximately 70 per cent of Eircom's value is now effectively represented by Vodafone stock.

For Eircom shareholders, the Vodafone deal still looks like the best available and the one that is most likely to unlock value in Eircell. The stock market is currently worried about the huge capital investment that telecom companies will have to make in coming years to roll out new mobile telephone services.

Consequently, potential investors in telecom stocks are currently staying on the sidelines until a clearer view emerges of the likely magnitude of revenues from new mobile services such as 3G.

Furthermore, several companies such as France Telecom, BT and KPN of the Netherlands, have plans to float part of their mobile assets on the stock market to raise funds to reduce debt. The expectation of these large share issues is acting to depress the valuations being placed on mobile phone companies currently.

However, in the long term the Vodafone shares that Eircom shareholders receive in exchange for Eircell should rise once the current issues of high debt and uncertainty about the roll-out of new services are resolved. Regarding the value of the remainder of Eircom, the picture remains clouded.

It does seem as if the valuations being placed on fixed line telecom assets have not fallen significantly in recent months. In this context it would seem to follow that the fair value of the fixed line business should not have changed materially in recent months.

Therefore, there may be some hope that the mooted value being placed on Eircom exEircell of €1.10 (£0.87) per share by eIsland will have to be increased if it is to succeed. However, this will probably require the entrance of another interested party to create a competitive bidding situation.