Eircell sale could spark Eircom share revival


Negotiations with Voda fone on the sale of all or part of the Eircell operation have presented Eircom with an opportunity to review its entire portfolio of businesses with a view to releasing value for shareholders.

The result is likely to be a break-up of the current operation into a number of separate publicly quoted businesses - along the lines of what is being considered at British Telecom and some of the other large, world telecoms companies.

This should allow the company to achieve value for shareholders closer to its value of its individual business assets - current market sentiment may undervalue fixed line and multimedia against mobile assets within a consolidated business. So a break-up should unlock a higher value for these assets.

Before the discussions with Vodafone started some weeks ago Eircom was already well advanced with its plans to float off its multimedia/Internet businesses and its lucrative Golden Pages operation.

One industry source suggested there is a strong case for selling the Eircell business now - arguing that it was at the peak of its value with 60 per cent of the market and over one million customers and could only lose out through increasing competition as more mobile licences are awarded.

A deal with Vodafone, if it is agreed, is expected to be a mostly paper offer where Eircom would get shares in Vodafone to the value of the agreed valuation of Eircell. The size of the Eircell valuation - estimated at between €4 billion and €5 billion - would make a pure cash sale unlikely. Holding Vodafone shares - especially shares acquired at its current relatively low market level - would be attractive to Eircom. Vodafone is the largest mobile phone operator in the world.

It operates purely in the fast-growing mobile phone market and does not carry a large high-cost, fixed-line operation. It has built up operations in Europe, the US and Asia. It would allow Eircom to be part of a company which appears well placed for growth across a wide number of geographic markets. Vodafone's interest in Eircell stems from its dominant position in the Irish mobile phone market and its success at rapidly building up a large customer base.

Eircom has been trying for some time to find ways to unlock the value of the assets it owns. At its current level - it closed at €2.46 on Friday - analysts say the Eircom share price has fallen well below the value of the sum of its business parts. With its shareholders becoming increasingly disgruntled by the share price performance, Eircom management have been engaged in discussions with a number of international telecoms companies in order to explore strategic options for the group.

Its early strategic partners - KPN and Telia have both informed the company that they are selling out - KPN in the short term though Telia has given an undertaking to remain on board until January 2001.

The company strategy is to have partners or strategic investors in place for each of its business areas.

As a former monopoly market operator now faced with increasing competition in all of its business areas, the company needs to address issues of pressure on its existing market share, the need to cut its prices, its high cost base and generating funds for future investment in technology.

Eircom needs to form deals that will give its access to wider geographical markets and bring technological expertise.

A deal with Vodafone may be attractive to selling shareholders KPN and Telia who together own 35 per cent of Eircom. A successful deal should allow them to get more for their Eircom shares than the current Eircom share price would allow through a secondary placing of the shares on the market.