How the Swisscom courtship unravelled

Eircom missed its chance to sell at a good price, writes Arthur Beesley, Senior Business Correspondent

It wasn't supposed to happen like this. Eircom's board were willing sellers to Swisscom, yet the Swiss government all but spiked the deal last Friday. "Fiasco is the right word to describe it. It's pretty extraordinary," said one London-based Eircom investor.

The Dublin market has taken the view that the dalliance between the two companies is over, although the Irish telco remains in play. The only thing that can be said with certainty at this stage is that any new approach for Eircom will be at a lower level than the level of a "tad above" €2.40 per share that was mooted by Swisscom.

That price implied a value at least €2.57 billion on Eircom. The Swiss affair means such a valuation would be very difficult if not impossible to realise in the event of another approach.

Several factors are at play here. First, the decision of Eircom's board to grant exclusivity to Swisscom indicated a clear willingness to do business. No matter what the board says about having a definite strategy to move the company forward on its own, the stock is now trading far below the levels suggested in the Swisscom approach. Eircom shares closed last night at €1.96 per share.

With a landline franchise in decline and a difficult integration of the Meteor mobile business ahead, achieving good share price growth will be a big challenge.

Even if another approach emerges, Eircom suffered a distinct setback after due diligence began when it failed to win the last third generation mobile licence. That alone might have put downward pressure on the price that the Swiss would have paid. It will only weaken Eircom's hand further if another group makes an approach.

It should be borne in mind that no other group had signalled any interest in recent weeks when a team of Swisscom officials were doing due diligence on Eircom. That examination was all but done last Friday when the Swiss government froze the deal.

Due diligence was said to have gone well - and a formal bid was expected some time next week. That's not on the cards now. Any slim hopes that Berne would relent dimmed on Wednesday night when Swiss justice minister Christoph Blocher said Swisscom's management should step down if it maintains its foreign acquisition plans. "We don't want a second Swissair. And there Switzerland only had a 6 per cent stake and only lost a couple of billions," he told Swiss television.

The confrontation between the government and its telco wouldn't seem half as unseemly if Swisscom chief executive Jens Alder had not staked his reputation on plans to expand abroad.

Swisscom has too much cash, falling profit margins and increasing competition on its own doorstep. Only three weeks ago, Mr Alder was saying that Swisscom preferred to take full control of any company it would buy. "In the last five years there has not been a single moment that we did not have three projects running at the same time. That is also the case today."

Renewed government criticism of that very strategy only serves to increase pressure on Mr Alder. His prospects look bleak, given that the Eircom dead-end was swiftly followed with the €10.2 billion sale of another prominent Swisscom target, Denmark's TDC, to a consortium of five private equity groups.

What is more, the latest setbacks come after an unsuccessful attempt to acquire Austria Telekom last year followed by a poorly executed bid for the Czech firm Cesky Telecom.

There appears little doubt in the market that Eircom and its advisers believed Swisscom had the political support required to go the distance with a deal when they granted exclusivity.

So why did the Swiss government hoist the drawbridge now? Mr Blocher was the second minister to refer to Swissair, whose ruinous investment in the Belgian carrier Sabena left Switzerland without a national carrier in the aftermath of the 9/11 attacks on the US in 2001.

But another member of the Swiss cabinet - interior minister Pascal Couchepin - went much further than that last Tuesday when he told a number of newspapers that the decision to block foreign expansion generally was rooted in a desire to prevent the Eircom deal. Eircom was a company with weak growth prospects, he said. For good measure, he also noted that the 17 per cent collapse in Eircom's share price last Friday indicated that the stock was inflated. "Swisscom was about to acquire a company at an overvalued price," he said.

This view was very similar to the stance adopted by Deutsche Bank in a note last weekend, which said the purchase of Eircom would be "value destructive" for Swisscom. The Irish company's fair value was around €1.90 per share, it said.

A transaction would have been a bonanza for Eircom's shareholders, its top management and the staff-owned trust that holds a 21 per cent stake in the company and was apparently willing to countenance a sale to Swisscom.

As it stands, the former State monopoly is left alone after an ill-fated dalliance that failed to deliver all that it promised. Jilted by its partner of preference, it will finish the year on the discreet lookout for a lesser replacement.