High time for Eircom to tidy up its act

Last Friday witnessed one of the worst telephone blackouts in Dublin when computer software failures cascaded through two South Dublin telephone exchanges leading to chaos amongst households and particularly businesses.

The degree of integration and interdependence in the telephone network was highlighted by the fact that the mobile phone network was also affected. That the blackout occurred on the same week as Eircom's maiden set of interim results as a quoted company was something of an unfortunate coincidence.

In contrast to the drama that unfolded on the telephone exchanges, Eircom's financial results were greeted with a big yawn from the financial markets.

In their own right these were a reasonable set of results although growth was entirely dependent on a good performance from Eircell, the mobile phone operation. It now commands 58 per cent of the mobile phone market although much of the growth has been in the lower quality "Ready to Go" segment. However, over time many of these customers will probably switch to the billing system.

In contrast Eircom's revenue from fixed lines only grew by 1.9 per cent and clearly the arrival of new competitors is eating into Eircom's customer base, particularly among business users.

Eircom's share price barely reacted to the results indicting that there was nothing in the figures to stimulate short-term upside in the shares. However, a significant portion of the pedestrian share price performance is probably due to the breathtaking pace of change in the telecom sector internationally.

In comparison to the exciting prospects of its international peers, Eircom's future strategic direction seems unclear. In contrast, corporate alliances, mergers and acquisitions and hostile bids are creating a huge buzz and excitement across the global telecom sector. Witness the cross-border hostile bid by the UK mobile phone operator, Vodafone, for the giant German engineering and telecoms company, Mannesmann.

At €125 billion (£98.45 billion) plus, this would be the biggest corporate takeover ever. Not alone that, but the bid has already elicited verbal interventions from both the German and British prime ministers. As well as these mega-deals, the business pages of the press contain reports virtually every day of corporate activity among companies ranging from new early stage companies to the more established players.

This most recent burst of corporate activity has combined with generally good financial results to inject a burst of price appreciation amongst telecom shares. As the table shows the past month has witnessed rises of more than 25 per cent in many of these shares and indeed Spain's Telefonica has risen by more than 36 per cent. Over the same period Eircom's share price has appreciated by only 6.6 per cent.

This relative underperformance of Eircom to its international peers is worrying for shareholders because it seems to indicate that the big international investment houses are taking a wait-and-see approach to Eircom's future direction.

Until sentiment from international investors towards the shares turns positive it is difficult to see the share price catching up with its international counterparts. Also from the company's viewpoint, if under-performance persists it could make it more difficult to complete strategic deals, which very often rely on the company having a highly rated share price.