Eircom is a willing partner for pushy Swisscom

Company is something of a deal magnet, writes Arthur Beesley, Senior Business Correspondent

It goes on and on, the Eircom saga. Not 20 months have passed since the telco's second flotation in five years and the firm is once again on the blocks. The suitor this time is Swisscom, a company in a strategic cul-de-sac after the failure of its most recent attempts at international expansion. But already there are signs that it may have found a willing partner in Eircom.

Of course the former Telecom Éireann has been down this road before. A deal would bring its fourth change of ownership since 1999, when the then minister for public enterprise Mary O'Rourke ran a flotation that left tens of thousands of small shareholders nursing severe losses from their first flutter on the stock exchange. As investors rushed in with their life savings and borrowings, they were told that the value of shares can rise or fall. In the case of Eircom, they fell and fell. A bonanza it was not.

That was then. A company that struggled at first to find its feet outside the semi-State sector has become, with time, something of a deal magnet. As if addicted to action, Eircom was floated, taken private by Sir Anthony O'Reilly, and floated again. Along the way, it sold the mobile unit Eircell to Vodafone. Just weeks ago, it agreed to buy Meteor, the third mobile operator.

Now comes Swisscom, a suitor that must already know it is pursuing a partner that is more accustomed than most to the dating game. The big irony in the affair is that Swisscom is controlled by the Swiss government, owner of 66.1 per cent of its stock. If the deal is done, the inevitable upshot must be that Eircom's profits would ultimately find their way into the Swiss exchequer in the form of dividends. Such is the nature of the free market.

So what is the rationale behind a move that Eircom described, in circumspect stock market parlance, as "a preliminary approach from a potential offeror that may or may not lead to an offer being made for the company"? More important still, what's in it for Eircom? And what of its customers?

Swisscom's official spokeswoman maintained her silence yesterday, but the potential strategic advantages for the company are as clear as when it made an unsuccessful attempt to acquire Austria Telekom last year and followed that with a poorly executed bid for the Czech firm Cesky Telecom.

Cesky went to Telefónica of Spain, leaving Swisscom back at first base and increasingly desperate for a deal. The company has too much cash, falling profit margins and increasing competition on its own doorstep. Its staffing levels have been trimmed back, but it needs to spend money on a strategic deal soon or increase its share buy-backs.

It is for Eircom to make the next move. Its directors will meet sometime next week to discuss whether the company should agree to talk exclusively with the Swiss and open its books to them for a due diligence examination. The very fact that the board made a statement to the stock exchange on Wednesday, albeit in the face of a rising stock price, indicates that the company is taking the approach from Swisscom seriously.

According to senior market sources, the board is very likely to allow Swisscom proceed with due diligence on the basis that its expression of interest could give value to shareholders. Swisscom has indicated that it may pay between €2.40 and €2.50 per share for Eircom, a price that puts a valuation of at least €2.57 billion on a company worth €1.15 billion at the time of its second flotation.

While that alone might be persuasive, Eircom after the Meteor ideal is a heavily-indebted company. The company is cash-rich, but needs that money to pay its loans. It will need significant capital when it comes to build up Meteor, a company that is very much the laggard in the mobile market behind Vodafone and O2.

This is where the dalliance with Swisscom becomes particularly interesting. People at the highest level in Swisscom are believed to have had a tentative dialogue with their counterparts in Eircom earlier this year. While those contacts were inconclusive, the fact that Swisscom went ahead with its preliminary approach last week strongly implies that the company sees a future in Eircom's new mobile unit.

The Swiss may be thinking that the only way is up for Meteor. According to one Dublin analyst, they may also see greater potential to grow a broadband business that is far behind most others in Europe.

For all that, the attitude to the Swiss approach of the employee-controlled trust that owns 21 per cent of Eircom is not known. Neither is that of the Australian group Babcock & Brown, which built up a stake of 12.5 per cent in Eircom this autumn before it came fully into play. A bid would founder without the staff. Without Babcock & Brown, a complex task would be much more difficult.

So what does the market think? Analysts in Dublin were muted in their morning notes yesterday, although one said later that any deal would be purely financially driven from Swisscom's perspective. This observer said consumers shouldn't expect big improvements in the level of service from Eircom just because it was being run by the Swiss.

Rather, the Swiss would have a hard job maintaining the performance of the company's current management, who have proved adept at protecting Eircom's patch. "If anything, Eircom is a very well run company. I would question whether any new parent could come in and manage it better.

"The risks are, would they be able to deal with the regulator and the competition to the same extent as the current team can?"

For Citigroup in London, Eircom's proven ability to repel the demands of ComReg may yet come back to bite it. "Approval of the acquisition may be subject to the acquirer making major concessions on regulatory change. These changes could prove unpalatable, as they would threaten Eircom's profitability and cash flow."

On the up side, Citigroup said in a separate note that Swisscom was unlikely to face as much competition from either financial investors or other telcom operators in its pursuit of Eircom. "Swisscom will be less troubled than most suitors by the strategic pros and cons of acquisition, it said.

According to Citigroup, Swisscom's desire to leverage its balance sheet should outweigh "strategic concerns" about the absence of obvious efficiencies that could be derived from Eircom and limited potential for revenue growth from the fixed line business.

And what of the price? London analyst Michela Gerachi of Pali International said there was no real strategic or industrial logic behind a bid from Swisscom, besides the lower cost of capital that would come from the leveraging of its balance sheet. "It's expensive, on valuation, on multiples and on general comparisons with the industry."

While Swisscom has yet to declare its hand, all the signs are that it has already considered such issues in some detail. If the deeper arguments about the financial aspects of a deal cannot be made until a firm bid is out in the open, the Swiss have had plenty time to do their homework since they first met Eircom.

Looming in the background is the possibility that Swisscom might prevail, against the odds, in the race for the Danish company TDC and set aside its Irish ambitions. Already well advanced, that sale is at due diligence. TDC could be worth €12 billion, a price that would make Eircom difficult to digest at the same time.

That must remain a consideration for Eircom. But if the Irish company is not Swisscom's only interest, it is dealing with a serial bride in Eircom. It has been down the aisle before.