Eircell legacy takes joy out of Eircom price rise

The long-running battle for Eircom must by now have entered the final lap and the end of a unique period in Irish corporate history is in sight.

Eircom, without Eircell, now resembles the Telecom Eireann of old, given that it is essentially a traditional fixed-line telephone business.

It is salutary to realise that after all the hype surrounding the mobile phone business, it is the fixed-line business that is now more valuable. The period since the sale of Eircell to Vodafone has witnessed a sharp decline in the Vodafone share price. It is likely that the vast majority of Eircom's small shareholders are still holding their Vodafone shares.

As the table shows, the Eircom share price has been relatively strong over the past three months and is currently trading at over #1.30.

Vodafone paid Eircom shareholders for Eircell with approximately 0.47 Vodafone shares for each Eircom share.

Therefore, a small shareholder who originally bought 1,000 Eircom shares will now hold approximately 470 Vodafone shares that are currently valued at about #1,110 (£874). At the current market price, the value of the 1,000 Eircom shares is #1,320. Clearly, the bidding war for Eircom between the competing Denis O'Brien and Sir Anthony O'Reilly-led consortia has been the key factor in pushing up the value of the fixed-line telephone business.

It is, however, cold comfort to those investors who bought Eircom at the IPO and who are still nursing large losses given that the combined value of their Vodafone shares and Eircom shares is still well below the cost of the initial investment.

De-merging and restructuring of telecom businesses is not something confined to the domestic scene. Indeed, the global telecommunications business is going through unprecedented restructuring. The animal spirits that were unleashed during the booming 1990s have now given way to a much harsher commercial environment. Evidence of just how severe conditions are can be gleaned from recently released data that point to over 290,000 job cuts in the global industry since the start of this year.

These job losses have been heaviest among the telecom equipment manufacturers such as Alcatel, Marconi and Lucent Technologies.

In such an environment it should come as no surprise that telecom share prices have continued to decline from already depressed levels over the past three months (see table). The most highly indebted European telco, KPN, has suffered from a precipitous 60 per cent fall in share price in recent months. British Telecom's share price has fared somewhat better, declining by only 4 per cent over the past three months. BT's survival strategy has at least partially mirrored that of Eircom. BT is in the process of de-merging its mobile and fixed-line businesses into two separate companies, BT Wireless and Future BT.

By the end of the year these two companies will have separate stock market quotes. Unlike Eircom, BT is large enough to maintain its independence and is engaged in a massive rights issue to raise £5.9 billion sterling (#9.6 billion) of new equity. The new shares had to be issued at a massive price discount to ensure success, but at least it means that BT's balance sheet is now in reasonable shape.

Even though the share prices of telecom companies have fallen sharply, they still do not offer great value to investors when measured by price-earnings ratios (P/E's). For example, BT is still trading on a P/E of 41.3, which is well in excess of the average for the market as a whole and BT offers a modest historic dividend yield of 1.7 per cent.

The industry still faces enormous challenges and heavy spending commitments regarding the ongoing development of new services. In particular, technical and financial hurdles regarding the rollout of 3G services have led most telecom companies to reduce sharply their expectations as to the speed at which such services will eventually generate new revenue streams. Therefore, it does seem as if the global telecom industry still has some way to go before the bottom of the current cycle is reached.