End of the line for Irish phone firms?

As we rapidly approach the end of the millennium it seems that we could also be witnessing the end game for an indigenously-owned telecommunications sector. The pace and extent of corporate activity across the global telecommunications sector remains breathtaking and recent developments highlight that the Republic is not being left behind.

However, Irish companies are finding that they are not sufficiently strong to be predators in this global rationalisation. Esat Telecom is the subject of a bid from Newtel, which is a merger of the two Nordic companies Telia and Telenor. By announcing that it is planning to sell its Eircom stake, the Dutch group KPN has in all probability put Eircom into play.

From a public-policy viewpoint it would probably be seen as desirable that at least some of the telecommunications infrastructure would remain in Irish hands. However, the speed at which international groups are developing their networks across national boundaries suggests that the Republic's Esat and Eircom are simply too small to compete head-to-head with the industry giants.

For Eircom, it would seem to be the case that the transfer of the company out of Government ownership was left too late to give the company sufficient time to develop internationally as an independent entity.

Competitive pressures in the domestic market could increase exponentially if Esat is taken over. The current bid by Newtel is complicated by the fact that the merger between Telia and Telenor seems to be in imminent danger of collapse.

In such a scenario, Newtel's bid for Esat couldn't go ahead but it does seem that a number of other interested parties are waiting in the wings. One name mentioned is that of British Telecom which if it materialised would present a major competitive threat to Eircom.

In any event competition is set to intensify next year in a significant way when NTL (the buyer of Cablelink) begins to roll out its services. NTL has also acquired companies in France and Switzerland and its aim will be to capture new customers by offering television and telephone services at lower costs. Phone and Internet revenue from cable networks is forecast to quadruple worldwide over the next four years.

Since its flotation during the summer, the strategic options facing Eircom would seem to have contracted at an alarming pace. Undoubtedly, the killer blow to Eircom's international ambitions has been delivered by KPN's decision to sell its Eircom shares. At the time of its flotation a joint move with KPN into the British market was seen as a possibility. Without a strong partner like KPN it is difficult to see Eircom breaking in to international markets on its own.

KPN's shift of focus towards central Europe and its international mobile network have been warmly welcomed by the stock market. Since early October KPN's share price has virtually doubled and as the table shows it is now on a much higher price-earnings ratio than Eircom.

This is a dramatic turnaround from the position shortly after Eircom's flotation when the market awarded Eircom a much higher rating than its international peers. Eircom's forecast price earnings (P/E) ratio for 2000 is 25.5, which makes it one of the cheapest of the European telcoms. This shift in the stock market's perception of relative value highlights just how quickly competitive advantage can be whittled away in the current environment.

While it is still too early to predict the outcomes of the Esat bid and the sale of the 35 per cent stake in Eircom, on balance the most likely outcome is that both companies will eventually be owned by their much larger international competitors.