O'Brien may have to raise bid to get board support

The valuations being put on Eircom, and its various components, vary widely. But one thing most analysts agree on is that Eircom is undervalued at its current price. They are also united in the view that a bid of €2.2 billion for Eircom's fixed-line business is unlikely to succeed and that Mr Denis O'Brien and his consortium will have to make a higher offer if it is to win the Eircom board's backing. The only caveat is that apart from the O'Brien approach, there is no obvious alternative buyer for Eircom's fixed line business, a sector of the telecoms business that is currently being shunned by investors who prefer the supposedly stronger growth prospects of mobile phones.

But the latest developments at Eircom do mean that the hundreds of thousands of shareholders who invested in the company's flotation 16 months ago now have a realistic possibility of at least breaking even on their investment and possibly making a modest profit on the €3.90 they paid for each Eircom share.

Eircom is now the focus of an astonishing level of corporate activity.

Mr O'Brien has made an initial approach to buy the fixed-line business for €2.2 billion, a level that is unlikely to be accepted by the Eircom board.

British mobile phone giant Vodafone has offered a share swap arrangement for Eircell which values the Irish mobile company at more than €5 billion.

Eircom is in the process of either floating off - or more likely selling - its Internet and directories business on the stock market with a possible valuation of €800-900 million.

Potentially, if all these deals go through, Eircom shareholders could end up owning shares in Vodafone. They would also get a cash distribution from the sale of the fixed line business to the O'Brien grouping and the sale or flotation of the Internet and directories business.

What shareholders will be hoping is that the combination of these various elements will amount to at least €3.90 and hopefully a little bit more.

So, is a bid of €2.2 billion for Eircom Ireland - the fixed line business - reasonable value? Analysts in Dublin and London who spoke to The Irish Times were agreed that this substantially undervalues the business, whatever method is used to value it, and obviously does not include any bid premium that a buyer would have to offer to get the Eircom board's support.

Analyst Ms Jemma Houlihan of ABN-AMRO has already valued the fixed line business at €3.3 billion, which is the equivalent of €1.50 a share based on Eircom's 2.2 billion shares in issue. But to emphasise the variation in valuations, Merrion Stockbrokers analyst, Mr John Coolican, has valued the same business at €2.4 billion. The variations are largely down to what level of growth the various analysts expect for the fixed line business.

But even those analysts who put a conservative value on the fixed line business believe a €2.2 billion offer is too low and that Mr O'Brien will have to pitch his offer significantly higher - possibly closer to €3 billion.

Whether he is willing to pay so much for a business he has publicly vilified repeatedly in the past, is strongly unionised (unlike the non-union Esat), and is arguably in the lowest growth and most competitive sector of the entire telecoms industry, remains to be seen. If he is willing to pay that sort of price for Eircom Ireland, it is the equivalent of around €1.35 per Eircom share.

On the mobile side of the business, The Irish Times has already reported that British giant Vodafone has indicated willingness to swap one of its own shares for every two shares of a demerged Eircell. While Eircell's value will vary with the Vodafone share price and not least the euro/sterling exchange rate, Vodafone's current price in the market puts a value of more than €2.40 on demerged Eircell shares.

So what's left over once the fixed line and mobile parts of the business are excluded? Eircom has a variety of multimedia business, including the wholly-owned Indigo Internet provider and LAN networking business, as well as minority shares in the Nua Internet consultancy, the Flexicom software company, the Buy4Now.ie Internet shopping venture and a 51 per cent stake in Trinity Commerce. ABN's Ms Houlihan has valued these interests at €0.40 per share and the 63 per cent of Golden Pages at €0.10 a share.

So, €1.35 a share for the fixed line business, more than €2.40 a share for Eircell and €0.50 a share for the rest. That, theoretically, is the value that could be placed on Eircom but that depends on a variety of factors, not least Mr O'Brien's willingness to offer a price for the fixed line business that Eircom management believes reflects the true worth of the business.

Eircom will invest £10 million in a system which will convert e-mail messages to voice over the telephone, it said yesterday. When using the "unified messaging" system, its customers will be able to collect messages from fixed-line and mobile telephones on personal computers and use telephones to access emails. A 12-week trial has commenced in Cork.