Eircell news brings Eircom takeover into view

Eircom may become the subject of a takeover battle following the announcement that Vodafone AirTouch is in talks to buy its mobile arm, Eircell.

Eircom executives said yesterday they expected the news to flush out other potential suitors for the company.

The emergence of another bidder for either all or part of Eircom would give a further fillip to the share price, which rose 12 per cent to €2.75 yesterday. A company source said Eircom had had talks with several telecommunications companies in the recent past, but the Vodafone negotiations were the only live talks at the moment.

He said there was nothing to prevent Eircom talking to third parties as no exclusivity agreement had been signed.

The talks, which were announced to the market yesterday, have been going on for six weeks and could be concluded by the end of the month.

If successful, it will probably involve Vodafone issuing shares to Eircom which will be passed on to shareholders.

Based on the €4 billion (£3.15 billion) valuation given to Eircell, existing shareholders should get one Vodafone share for every two Eircom shares they own.

The value of their Eircom shares will be considerably reduced as Eircell accounts for more than half of the company's stock market valuation. The Eircom board, chaired by Mr Ray MacSharry, will ultimately have to decide whether to sell either all or part of Eircell.

It is understood it has not yet considered the matter formally as the talks are not yet sufficiently advanced. The directors may feel obliged to formally invite offers from other bidders for Eircell. Mr Alfie Kane, the Eircom chief executive, is understood to be strongly in favour of the sale of Eircell to Vodafone.

It represents a significant change of tack by Mr Kane whose strategy to date has been based on Eircom being a dominant player in all sectors of the Irish market, possibly with strategic partners. Company sources said yesterday that Mr Kane's change of heart reflected a shift in sentiment in the market towards firms that specialise in one sector, be it mobile, fixed line or Internet.

British Telecom is expected to state shortly that it will break up its business along these lines to realise shareholder value.

Mr Kane is under considerable pressure to do likewise from his shareholders, many of whom are sitting on significant losses after buying in at the flotation price of €3.90 in June of last year.

The company is also aware that Vodafone could appear on the Irish scene next year when the licences to operate the third generation of mobile networks are awarded.

Eircom sources said yesterday the desire to realise value rather than underlying strategic concerns drove the decision to consider selling Eircell.

The sale of Eircell will inevitably bring about the break up of Eircom as the firm already plans a €1 billion flotation of its multimedia business next year.

Eircom is keen to proceed with this strategy quickly to capitalise on the market's appetite for such deals and before BT, which owns Esat Telecom in Ireland, comes to the market with its plans.

Eircom is advised by Merrill Lynch, the US merchant bank involved in the flotation which sought a higher debut price than the €3.90 ultimately agreed.

The Employee Share Ownership Plan Trustee, which owns 15 per cent of the company on behalf of staff, declined to comment yesterday on whether it would support an Eircom break up.

Although the trustee is obliged to act in the interest of its members, many of whom are no longer employees, rather than the Eircom workers, its seven-man board is dominated by four nominees of the company's unions.

The latter are unlikely to see the break up of Eircom - after less than two years as a public company - as in employees' best interests.

If, as expected, the Eircell sale is paid for via Vodafone shares, the trustee will find itself holding a large number of shares in the global mobile group, but having no representation.