The 500,000 people who purchased shares in Eircom when it floated on the stockmarket must now be ruefully reflecting on the old investment warning that "shares can fall as well as rise". Immediately after the flotation it seemed that the shares could only go one way - upwards. They peaked at €5 shortly after they listed on the market, but have slipped steadily since then. Yesterday they dropped sharply to new lows, touching €3.30 at one stage, before recovering somewhat to close at €3.47, still 25 cents down on the day and 43 cents below the float price.
What are the reasons for the current weakness? Unfortunately, there are more sellers in the market for Eircom shares than buyers at the moment. The shares were already slipping last week, suffering from an overall decline in telecommunications shares across Europe. However the news that two Eircom shareholders - KPN of the Netherlands and Telia of Sweden - are to sell their combined 35 per cent stake was the main factor behind yesterday's fall. This huge amount of shares coming onto the market is bound to depress the price in the short term.
It has been clear for some time that KPN and Telia were intending to sell their shares. It was thought possible that one purchaser - another large telecommunications company - would buy most of the shares, possibly as a prelude to a takeover bid for the Irish company. This possibility had been supporting the Eircom share price to some extent; it now appears unlikely, though by no means impossible, that such a major buyer will emerge.
This means that KPN and Telia will try to sell their shares to big investment institutions and to the public. They will shortly commence a major marketing campaign to assess what interest there is in buying the shares. The speculation in the market is that to sell all the shares they will have to offer them at a low price - possibly substantially below yesterday's close. Much depends on what happens in the markets over the next couple of weeks. But with a lot of telecoms share coming on the market - Telia is floating some of its own shares and Deutsche Telekom is selling more of its equity - the prospects for the sale price and thus for the Eircom price do not look good in the short term.
What should investors do? The best advice is to hold on to the shares and not to be rushed into a quick sale. The price is likely to be weak for some time now as the KPN/Telia shares are sold - unless another international company uses the period of share price weakness to launch a bid for Eircom. Those who hold on will also get a loyalty bonus in July on the first anniversary of the flotation; this amounts to 1 share for every 25 they hold.
Eircom is a company with substantial assets and a leading position in Europe's most rapidly growing economy. Its Eircell subsidiary is particularly valuable and is well placed to benefit from the growth in mobile telephony and new technologies in this area. If Eircom's management exploits these assets, then the share price should recover in the longer term. And whether they are successful or not, the company will be vulnerable to takeover as the European telecommunications industry consolidates in the months ahead, which should also benefit the share price. While further volatility may lie ahead, Eircom shares have a good chance of appreciating from their current lows in the months ahead.