EIRCOM shares rose 11.8 per cent to €2.75 yesterday on confirmation that the company is in talks to sell Eircell, its mobile phone subsidiary, to Vodafone AirTouch, the world's largest mobile telecommunications business. The shares peaked at €2.83 yesterday but fell back during the afternoon to close at €2.75. They could make further gains this week if, as expected, a rival bidder emerges.
The confirmation that Eircell is on the block is expected to attract interest from other international telecommunications companies targeting Eircell or possibly the whole of the former State-owned phone company.
If a deal is concluded, Vodafone is expected to pay for Eircell, worth about €4 billion, with its own shares which would be distributed to Eircom shareholders, according to company sources.
Industry analysts said yesterday that shareholders could expect to get in the region of one Vodafone share, currently worth 246p sterling (€4.10), in addition to every two they hold in Eircom.
Shares in Eircom would be worth less after the sale as Eircell accounts for about €1.80 of the value of each Eircom share, or some 73 per cent of the share price before yesterday's rise. Eircom shares are not expected to fall by that much and one analyst suggested the remaining Eircom businesses would be valued at around €2.20 per share.
However, the sale of Eircell would quickly lead to a break-up of the company as Eircom's management has already signalled its intention to sell off the group's Internet business next year.
This would leave a rump of Eircom Ireland which is the low-margin and increasingly competitive fixed-line business. After years of protection, this business will shortly face full competition for the first time.
The decision to consider selling the most valuable part of the Eircom business represents a significant change of strategy by Mr Alfie Kane, the company chief executive. Mr Kane is under considerable pressure to realise some of the inherent value in the business to compensate for the share price, which is well below its €3.90 flotation price.
In the region of 450,000 small shareholders participated in the initial public offering last year and are now nursing losses. Despite this, the decision effectively to split up Eircom in order to return some value to shareholders may not have the support of all stakeholders.
The Eircom Employee Share Ownership Plan Trust, which holds 15 per cent of the company on behalf of past and present staff members, declined to comment last night. The trust, which is strongly influenced by the Eircom unions, may oppose the sale but will not be able to block it. The trust is represented on the board of Eircom by Mr Dick Spring, the TD and former Labour Party leader.
Ultimately it will be up to Mr Spring and the other directors, led by chairman Mr Ray MacSharry, to decide if all or part of Eircell should be sold.
Company sources said last night they may feel that a formal auction should be organised to ensure the best price is achieved. Vodafone might pull out if the board insists on an auction. The result would be damaging for the share price which would quickly surrender its modest gains.