Eircom move bodes well for share price

The news that Eircom had placed down a deposit of £50 million sterling (#82 million) to enter the bidding process for a UK third generation mobile phone licence (UMTS) has as yet had a limited impact on sentiment towards the stock. Analysts expect the sale of five licences to net the British government up to £5 billion. Eircom is one of 13 bidders that includes some of the giants of the industry including BT, Vodafone Airtouch and the huge Japanese finance house, Nomura Bank.

Investors in Eircom have seen the company's share price improve in recent months although the rise still pales in comparison with other European telcos. For example, the Telecom's sector of the Dow Jones Stoxx Index has risen by more than 50 per cent in the past three months and some companies such as KPN of the Netherlands have seen a doubling in their share prices.

The table highlights that the big are getting bigger in the telecoms sector due to a combination of rising share prices and merger and acquisition activity. The size gap in terms of market capitalisation between companies such as Eircom and Portugal Telecom on the one hand and the industry giants on the other hand grows ever wider. Against such heavyweight competition the chances of Eircom succeeding in getting one of the UMTS licences must be considered low.

However, it has presumably entered the process in order to position itself to enter into partnership with other interested parties. It is expected that the total investment required for even one of the smaller licences on offer could amount to more than £1 billion.

It is certainly a positive development that Eircom is seeking to expand out of the home market. More importantly, a successful expansion into the faster growing mobile sector offers the prospects of providing the company with a more attractive mix of mobile and fixed telephone assets.

For the majority of the incumbent telecom companies, revenues from the fixed line businesses are expected to be at best static in coming years. In practice the likelihood is that increased competition will force revenues down. Eircom still earns the bulk of its revenues from its fixed-line business despite the rapid growth achieved by Eircell. Therefore, the implementation of a successful strategy into a niche position in the overseas mobile market is vital for the future prospects of the company.

Although Eircom's share price is now a healthy 20 per cent above the issue price, its shares are still trading at a much lower rating than its European peers. For example, Eircom's price-earnings ratio (P/E) of 25 compares with the P/E of 35 enjoyed by BT and the P/E of more than 70 attributed to Vodafone Airtouch. The premium rating enjoyed by Vodafone, which runs the largest mobile network in the world, reflects the much higher growth prospects that are forecast for mobile telecommunications.

For the army of small investors which has continued to hold its Eircom shares the prospects of further capital appreciation now seem quite good. If there is a successful outcome to the placing of the KPN stake, and if Eircom's UK ambitions begin to advance, the shares could well be re-rated by the market.