Investors unlikely to benefit from any bid combination

Eircom shareholders are likely to have to bear a loss of at least €1 a share even if Mr Denis O'Brien's e-Island consortium increases its bid for Eircom's non-mobile business, stock market analysts have suggested.

The view among analysts is that even if Mr O'Brien's consortium increased its indicated offer by 10 per cent to €1.20 a share, it would still only value Eircom in its entirety - including the Eircell mobile phone subsidiary being sold to Vodafone - at no more than €2.85 a share.

The suggested €1.10 a share offer from e-Island currently values Eircom/Eircell at €2.75, almost 30 per cent below the €3.90 flotation price of July 1999 and almost half the €5.00 high that Eircom shares reached in the immediate aftermath of the flotation.

Eircom and Mr O'Brien's consortium declined to comment on the reported €1.10 valuation put on the company by e-Island. But sources close to e-Island said that the suggested price reflects the weakness in telecom shares in recent months and also the fact that e-Island may now be bidding for all of Eircom's nonmobile business.

The original €1.00 a share offer last October was for the fixed-line assets alone, with the multimedia interests left with Eircom in the event of a sale of the fixed-line business.

The source said that e-Island's initial offer of €1.00 a share valued Eircom's fixed-line business at €2.25 billion, but that no more than €1.85 billion of that figure would have been available for distribution to Eircom shareholders after Eircom's €58 million debt and €338 million restructuring charge are taken into account.

This figure of €1.85 billion is equivalent to 82 cents for every Eircom share, which, said the source, is more than 31 per cent less than what shareholders would get if e-Island goes ahead with an offer of €1.10 a share. The source added that when the valuation put on Eircell by the current Vodafone share price is taken into account, the suggested €1.10 offer represents a 28 per cent premium on the value put on the fixed-line business by e-Island last October.

While some analysts were putting a value of 20 cents to 30 cents on Eircom's multimedia businesses when e-Island mounted its initial bid last October, most now put a value of no more than 10-15 cents on the business, reflecting the downturn in the dotcom sector in recent months. It is understood that eIsland puts an even lower valuation on the multimedia businesses, not more than a few cents.

The e-Island source also said that the prospect of an offer of €1.10 a share had little impact on Eircom's share price yesterday, reflecting the poor demand for telecom shares. Most of the major European telecom shares fell heavily yesterday - by more than 5 per cent in some cases. France Telecom was forced to dramatically pull back the flotation range for its Orange mobile phone subsidiary.

But sources close to Eircom dismissed the valuations being put on the fixed-line and multimedia businesses and in particular said that the 86 cents (net of debt) valuation on Eircom "doesn't stand up to scrutiny". He suggested that there is little prospect of the Eircom board supporting a bid of €1.10 a share for the non-mobile business.

Analyst Mr John Coolican of Merrion Stockbrokers said that assuming the €1.10 indicated offer ends up as a formal bid and is successful, Mr O'Brien and his colleagues will be getting a lot more for their new $2.4 billion bid than they would have got had they bought the fixed-line business alone for €2.2 billion.

Mr Coolican valued Eircom's multimedia business at around 12 cents a share, indicating that e-Island values Eircom's fixedline operations at no more than 98 cents.

Mr Coolican estimated Eircom's break-up value at €2.80 a share compared to the €2.75 valuation put on Eircom based on Vodafone's bid for Eircell and e-Island's likely bid for the rest of the company.

"Mr O'Brien is in a strong negotiating position and there may not be an awful lot more from him," he commented, adding: "It's very hard to see any combination of bids valuing Eircom at €3.00."