Eircom shareholders will welcome the rise in the share price caused by the news that the company is negotiating the sale of all or part of its Eircell mobile phone business to industry giant Vodafone. The shares rose as much as 14.5 per cent yesterday morning to €2.83, before easing to close at €2.75, still 12 per cent ahead on the day. There appears to be a reasonable chance that a deal will be done, even though its likely terms remain unclear.
There should be no doubt about what is involved. If Eircom disposes of all or most of Eircell, then what is in prospect is effectively a break-up of the former State company. If Eircell is sold, then the company will be left with its fixed-line business and a mixed bag of multimedia interests. It has been indicated that it is considering floating off the multimedia businesses separately.
The case for selling off all or most of Eircell rests on two arguments. First, Eircom believes that the market is currently undervaluing its shares by not focusing on the true value of all of its assets. By selling Eircell, it would hope to unlock some of this value for its shareholders. The price Eircom would receive for Eircell, combined with the value of the remaining shares, would be likely to be higher than the current market valuation of the company.
The second argument is that the company would then be part of a major international group. As part of Vodafone, the company would be part of the biggest international group with interests that span the globe. This would bring benefits to Eircell customers, who would find it cheaper and more efficient to use their phones overseas and to the company itself, which would benefit from the expertise and cash which a giant international partner would bring.
Eircom confirmed this morning that talks were underway with Vodafone, but Stock Exchange rules precluded it from commenting further. The biggest issue for the group is that Vodafone appears to want to buy all of Eircell. Despite the prospect of increasing competition in the mobile sector, there is a case for Eircom holding on to a substantial stake in Eircell. Mobile telephony is a huge growth area and the next generation of phones will make it much easier to access information and conduct transactions by mobile. By selling all of Eircell now, Eircom will not have any chance to benefit from this.
Eircom shareholders may take a different view. Tired of the falling share price, most would probably welcome a payout from an Eircell sale which would give them some cash, or Vodafone shares, in addition to the Eircom shares they would hold on to. So far, however, the final shape of the deal is unclear and if the talks fail, the shares are likely to fall back.
From the point of view of the economy, the sale of Eircell would mean that the bulk of the control of telecommunications in the Republic would rest overseas, as British Telecom owns Esat Telecom and, along with Telenor, owns its Digifone subsidiary. In an increasingly global business world, this is no great surprise, but it does mean that any profits to be earned from this key sector in the years ahead will flow overseas.
As the negotiations progress, Eircom management must keep a clear focus on what is best for shareholders in the long term. The falling share price has put them under pressure to do a deal, but they should only reach final agreement if they are happy that what is on offer can fit into a coherent strategy, as opposed to being just a quick fix.