Vodafone bid bigger deal for shareholders

The #2.25 billion (£1.77 billion) bid by Mr Denis O'Brien for Eircom's fixed line business may have grabbed the headlines in the last 24 hours, but the expected Vodafone bid for Eircell is a far bigger deal for Eircom shareholders. Eircom finally confirmed yesterday that it was in exclusive negotiations with Vodafone on the sale of all of Eircell to the British mobile phone giant.

The Irish Times has already reported that Vodafone has indicated that it is willing to offer one of its shares for every two Eircell shares, once Eircell is demerged from Eircom and shareholders get a pro rata allocation of Eircell shares. At Vodafone's 272p sterling closing price yesterday, this values Eircell at #5.1 billion or the equivalent of #2.34 per share.

The Vodafone/Eircell situation is fundamentally different from Mr O'Brien's e-Island all-cash bid for the Eircom fixed line business. If the Vodafone/Eircell deal goes through, Eircell shareholders will end up holding Vodafone shares. The value of those shares will depend on movements in the Vodafone share price and not least the value of the euro against sterling.

Eircell shareholders will, in effect, be swapping their euro-denominated shares for sterling-denominated Vodafone shares. The lower the euro falls against sterling, the higher the value that will be put on their Eircell shares. If, for example, the euro fell from the current 58 cents to 55 cents against sterling, it would put a value of #2.47 on every Eircell share.

If the e-Island bid for the Eircom fixed line business is accepted, Eircom will receive #2.25 billion in cash, with Eircom shareholders in line for a cash distribution as the company would, in effect, be wound up. All that would be left are the multimedia and directories businesses, which are being floated off and are not part of either the Vodafone or e-Island approaches.

If the Vodafone deal does go through, Eircom shareholders will have to decide whether to keep or sell the Vodafone shares they receive. That may have capital gains tax implications that individual shareholders will have to consider.

The current value put on Eircell is seen in the market as generous and very much at the upper end of estimates for the Irish mobile phone company. If Eircell was being valued on the same basis as other smaller mobile phone companies such as Libertel in the Netherlands, Mobistar in Belgium or Telecel in Portugal, the company would be worth around #2 a share.

But market sources believe Vodafone may be willing to pay a premium price for Eircell, as it would fit neatly with Vodafone's own mobile phone business in Britain and Northern Ireland and eliminate the roaming charges Eircell has to pay when its customers use the Vodafone network.