O'Brien offer is opening gambit in game of nerves

Denis O'Brien found many ways yesterday to say that his consortium's bid for Eircom's fixed line business was "rock solid", "full", "fair" and even "generous". "Christmas is coming early for Eircom shareholders," he stated with his traditional gusto.

However, it is rare in the extreme for any bidder to say that a first bid is anything other than generous and fair value. And rarely, if ever, has any bidder walked away when his opening shot has been rejected. Many in the market believe that, despite his protestations, Mr O'Brien and his colleagues have more to spend on the Eircom fixed line operations if this approach is rejected.

Mr O'Brien never stated categorically that this #2.25 billion (£1.77 billion) offer was final and would not be increased if rejected as inadequate by Eircom. When asked if his e-Island grouping would walk away from the bid if Eircom said no, Mr O'Brien would only say "probably". He went to great lengths yesterday not to publicly bind himself to withdrawing the bid if Eircom rejected the #2.25 billion offer.

So, is the Eircom fixed line worth the #2.5 billion to #3 billion that Dublin analysts believe, or is the business worth only the #2.25 billion, as Mr O'Brien says he believes?

For his part, Mr O'Brien says his bid is based on public information - Eircom's results - and various brokers' reports. But, using the same multiples of EBITDA (earnings before interest, tax and depreciation and amortisation), Mr O'Brien has come up with a significantly lower valuation for the business than many in the market.

Mr O'Brien said yesterday that the #2.25 billion offer valued Eircom fixed line operations at 3.7 times trading EBITDA and 4.2 times forward EBITDA. That compares with British Telecom's multiples of 3.6 times trading and 3.7 times forward EBITDA and 2.9 times trading and 3.2 times forward EBITDA for France Telecom.

"By that analogy, I don't think we're offering too little. It's a very generous offer. Our offer and the mooted Vodafone offer for Eircell are already well ahead of the Eircom share price. The market believes that this offer is full."

But market analysts who use the same EBITDA multiples still believe the offer undervalues the Eircom business. They put valuations of between #2.5 billion and #3 billion on the fixed line operations. There is a belief that, while Mr O'Brien is unlikely to contemplate paying anything like the #3 billion valuation placed on the business by one analyst, he may be willing to go towards #2.5 billion or the equivalent of about #1.15 per share.

Mr O'Brien is adamant his offer is not opportunistic and does not take advantage of the disgruntlement among Eircom shareholders. But he warned yesterday that "it was not in the interests of staff and shareholders for the board to reject this offer".

His message to Eircom shareholders is that, once the mobile phone business is sold off and the multimedia business floated, "the fixed line business is not viable as a stand-alone public company dependent for support on volatile capital markets".

"Frankly, I have not witnessed a queue of prospective partners for this business," he said. This is a clear message to Eircom shareholders that his is the only offer for the fixed line business on the table and, if shareholders want to see any return on their investment in Eircom, his offer should be accepted.

Eircom, for its part, has said only that it was looking for clarification of the O'Brien proposal before making any decision on the #2.25 billion on the table. But it is understood that Eircom believes the offer undervalues the business and that a higher offer will be required if shareholders are to get reasonable value.

The Eircom board - nursing wounds from last month's annual general meeting - also know that they will have to face the wrath of shareholders if they reject the offer and Mr O'Brien walks away with his #2.25 billion. In that situation, irrespective of the outcome of the Vodafone/Eircell situation, there is little doubt that Eircom shares would fall heavily and give up most of their recent gains.