Swiss board veto leaves Eircom in tough position

Analysis:For a company that has been trawling around Europe looking for an acquisition for two years, yesterday's news that Swisscom will not be allowed to buy abroad must have come as a shock.

The market had expected Eircom to be Swisscom's third- time lucky attempt, with moves on operators in Austria and the Czech Republic both having failed over the past 18 months.

More recently, the firm has also been linked with Danish telecoms firm TDC, with analysts confident that Swisscom could gobble up two foreign phone companies at the same time if it wished. The company was seen as a natural acquirer because of a need to re-engineer its balance sheet and to become more leveraged.

From Eircom's perspective, it was all going so well until this week. Swisscom wanted to put an offer on the table at €2.42 or above, Eircom wanted to be bought and due diligence was proceeding to plan. The problem, and the thing nobody expected, was that the Swiss government was all the while working to its own agenda.

Surprise number one came on Thursday when the government said that it wanted to sell off its 66 per cent stake in Swisscom. A political hot potato domestically, the decision was not given a universal welcome in Switzerland.

This cool reception may or may not have led to surprise number two: yesterday's news that the Swiss government's representative on Swisscom's board had been told to veto a foreign purchase.

This time, the reaction was one of confusion. Why had the Swiss government allowed Swisscom to get so close to buying so many companies abroad if it was never going to allow such a deal to go ahead?

Time will undoubtedly provide the answer but, for Eircom, things are a bit more pressing.

The company's shares fell hard yesterday, losing 16 per cent to close at €1.94. This is the price which, Tricia McEvoy, an analyst with NCB, says best reflects Eircom's "fair value", or its value in the absence of bid speculation.

This suggests that the market is fairly convinced that the Swisscom deal is off, even though neither party has actually confirmed that this is the case. In fact, Swisscom's statement yesterday made it clear that the board would try to act in the interests of "all" shareholders, not just the government. There were even some hints that a deal with Eircom could be passed by a majority board decision and would not need government approval.

Presuming, however, that discussions are at a standstill, Eircom is left in a rather difficult position. The firm had granted Swisscom exclusive due diligence rights, the corporate equivalent of picking a mate, getting engaged and sending out the invitations. Just as the altar rails were coming close, however, the groom seems to have bolted.

So might there be another potential partner lurking in the shadows? McEvoy is not convinced. A few months ago, she would have said Spain's Telefónica, Nordic operator TeliaSonera and Swisscom itself were the most likely suitors.

With two of these now out of the picture - Telefónica has since bought O2 - the dancefloor seems to be looking fairly empty.